Relative Risk Perception and the Puzzle of Covered Call Writing

14 Pages Posted: 10 Mar 2015 Last revised: 12 Mar 2015

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business

Date Written: March 10, 2015

Abstract

Market professionals with decades of experience typically argue that a call option is a surrogate for the underlying asset, indicating that they perceive the risk of a call option as similar to the risk of the underlying asset. Experimental evidence also points to the same conclusion. Such relative risk perception is in sharp contrast with finance theory, which argues that only the absolute quantity of risk contained in a call option should matter for its price. I show that relative risk perception provides a potential explanation for the puzzling performance of covered call writing.

Keywords: Risk Perception, Relative Risk Perception, Covered Call Writing, Informational Efficiency, Anchoring, Behavioral Finance

JEL Classification: G13, G12, G02

Suggested Citation

Siddiqi, Hammad, Relative Risk Perception and the Puzzle of Covered Call Writing (March 10, 2015). Available at SSRN: https://ssrn.com/abstract=2576114 or http://dx.doi.org/10.2139/ssrn.2576114

Hammad Siddiqi (Contact Author)

University of the Sunshine Coast-School of Business ( email )

Brisbane, QLD 70010
Australia
+61404900497 (Phone)

HOME PAGE: http://www.usc.edu.au/staff-repository/dr-hammad-siddiqi

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