Relative Risk Perception and the Puzzle of Covered Call Writing
14 Pages Posted: 10 Mar 2015 Last revised: 12 Mar 2015
Date Written: March 10, 2015
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: Suggested Citation