A Closer Look at the Disposition Effect in U.S. Equity Option Markets

Journal of Behavioral Finance, Vol. 21, 66-77.

31 Pages Posted: 21 Jun 2016 Last revised: 27 Mar 2020

Date Written: March 16, 2019


Our study explores whether the disposition effect occurs in U.S. equity option markets. The disposition effect implies past winning securities will be undervalued and past losing securities will be overvalued. By adapting Grinblatt and Han’s [2005] unrealized capital gains proxy to the option markets, we document a significant relationship between option capital gains overhang (OCGO) and option returns. We also find open interest decreases as OCGO increases, consistent with a disposition effect in U.S. equity options. This evidence contributes to the emerging literature on behavioral finance in derivative securities.

Keywords: Disposition effect, options, behavioral finance, reference price.

JEL Classification: G12, G13

Suggested Citation

Bergsma Lovelace, Kelley and Fodor, Andy and Tedford, Emily, A Closer Look at the Disposition Effect in U.S. Equity Option Markets (March 16, 2019). Journal of Behavioral Finance, Vol. 21, 66-77., Available at SSRN: https://ssrn.com/abstract=2798181 or http://dx.doi.org/10.2139/ssrn.2798181

Kelley Bergsma Lovelace (Contact Author)

Ohio University ( email )

1 Ohio University
Athens, OH OH 45701
United States

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Emily Tedford

84.51˚ ( email )

100 W 5th St
Cincinnati, OH 45202
United States

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