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Option Trading and Individual Investor Performance

42 Pages Posted: 1 Mar 2007 Last revised: 29 Dec 2015

Rob Bauer

Maastricht University

Mathijs Cosemans

Erasmus University - Rotterdam School of Management

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE)

Date Written: October 24, 2008

Abstract

This paper examines the impact of option trading on individual investor performance. The results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading. We attribute the detrimental impact of option trading on investor performance to poor market timing that results from overreaction to past stock market returns. High trading costs further contribute to the poor returns on option investments. Gambling and entertainment appear to be the most important motivations for trading options while hedging motives only play a minor role. We also provide strong evidence of performance persistence among option traders.

Keywords: option trading, individual investor performance, investor sentiment, performance persistence, Internet brokerage

JEL Classification: G11, G12, G14, G24

Suggested Citation

Bauer, Rob and Cosemans, Mathijs and Eichholtz, Piet M. A., Option Trading and Individual Investor Performance (October 24, 2008). EFA 2007 Ljubljana Meetings Paper; Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=965810 or http://dx.doi.org/10.2139/ssrn.965810

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Mathijs Cosemans (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

Burgemeester Oudlaan 50
Rotterdam
Netherlands
+31104082371 (Phone)
+31104089017 (Fax)

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

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883648 (Phone)
+31 43 3258530 (Fax)

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