Gambling Preferences, Options Markets, and Volatility

38 Pages Posted: 3 Jul 2013 Last revised: 1 Feb 2016

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Boone Bowles

Mays Business School at Texas A&M University

Ryan J. Whitby

Utah State University - Huntsman School of Business

Date Written: 2016

Abstract

Despite assumptions of mean-variance efficiency that underlie most asset pricing models, investors have shown a penchant for positive skewness. This study documents that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries. These results suggest that investors’ preferences for lottery-type stocks might be reflected in the level of call option volume. Perhaps, more importantly, we test whether these preferences affect future spot price volatility. Consistent with our expectation, we find that preferences for lotteries by call option traders directly affect future volatility in the underlying asset.

Keywords: options, lotteries, volatility

JEL Classification: G10, G14, G19

Suggested Citation

Blau, Benjamin M. and Bowles, Boone and Whitby, Ryan J., Gambling Preferences, Options Markets, and Volatility (2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2288910 or http://dx.doi.org/10.2139/ssrn.2288910

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Boone Bowles

Mays Business School at Texas A&M University ( email )

360Q Wehner Building
College Station, TX 77843-4218
United States

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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