Investor Trading Behavior and Performances: Evidence from Taiwan Stock Index Options

Abstract

A unique data set allows us to examine trading behavior and realized returns of all participants in the Taiwan stock index options. On average individual investors lose money and foreign institutions profit from trading options, even when they use the same trading strategy and for the same type of options. Foreign institutions that trade out-of-the-money options most frequently have the highest returns, while individual investors who predominately trade short-term and out-of-the-money options have the worse performance. Option trades initiated via market orders or aggressive limit orders have a higher probability of correctly predicting the underlying stock index movements and higher realized returns. Individual investors' trading performance improves with experience and sophistication. Finally, disposition effect distracts from trading performance.

Keywords: investor behavior, trading performance, index options