Limited Attention and Option Prices

Swiss Finance Institute Research Paper No. 20-64

76 Pages Posted: 6 Aug 2020 Last revised: 10 May 2022

See all articles by Alex Boulatov

Alex Boulatov

University of Houston - C.T. Bauer College of Business; HSE Moscow

Assaf Eisdorfer

University of Connecticut - Department of Finance

Amit Goyal

University of Lausanne; Swiss Finance Institute

Alexei Zhdanov

Pennsylvania State University

Date Written: January 31, 2022

Abstract

We show that (partial) inattention to the underlying stock prices generates a demand pressure for options on low-priced stocks, resulting in overpricing of such options. Empirically, we find that delta-hedged options on low-priced stocks underperform those on high-priced stocks by 0.63% per week for calls and 0.36% for puts. Natural experiments corroborate this finding; options tend to become relatively more expensive following stock splits, and options on mini-indices are overpriced relative to options written on otherwise identical regular indices. Skewness preference does not explain our results.

Keywords: Option Returns, Investor Inattention

JEL Classification: G13, G14

Suggested Citation

Boulatov, Alex and Boulatov, Alex and Eisdorfer, Assaf and Goyal, Amit and Zhdanov, Alexei, Limited Attention and Option Prices (January 31, 2022). Swiss Finance Institute Research Paper No. 20-64, Available at SSRN: https://ssrn.com/abstract=3607030 or http://dx.doi.org/10.2139/ssrn.3607030

Alex Boulatov

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4618 (Phone)

HSE Moscow ( email )

26 Shabolovka
Moscow
Russia

Assaf Eisdorfer

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Amit Goyal

University of Lausanne ( email )

Batiment Extranef 226
Lausanne, Vaud CH-1015
Switzerland
+41 21 692 3676 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/agoyal/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Alexei Zhdanov (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
834
Abstract Views
3,793
rank
40,367
PlumX Metrics