Striking Out: Biases and Losses of Retail Option Traders

66 Pages Posted: 30 May 2024

See all articles by Aleksi Pitkäjärvi

Aleksi Pitkäjärvi

Vrije Universiteit Amsterdam; Tinbergen Institute

Matteo Vacca

Aalto University

Date Written: May 30, 2024

Abstract

Analyzing over 15 years of account-level trading records from Finland, we show that option features—expiration, moneyness, and the strike price—influence the behavior of retail investors and exacerbate their behavioral biases. Retail investors selectively exploit the expiration feature of options to mitigate the psychological costs associated with selling losing positions, generating a strong disposition effect especially for out-of-the-money options. They also use the strike price of an option as an objective, instrument-specific reference point when making their selling decisions. Behavioral biases contribute to heterogeneity in option trading performance, with the worst performance concentrated among investors with the strongest biases.

Keywords: options, retail investors, behavioral biases, disposition effect

JEL Classification: G41, G40, G50, G11

Suggested Citation

Pitkäjärvi, Aleksi and Vacca, Matteo, Striking Out: Biases and Losses of Retail Option Traders (May 30, 2024). Available at SSRN: https://ssrn.com/abstract=4848713 or http://dx.doi.org/10.2139/ssrn.4848713

Aleksi Pitkäjärvi (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Matteo Vacca

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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