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Option Market Activity and Behavioral Finance
Josef LakonishokInmoo Lee
Allen M. Poteshman
2
How Do Investors Use Options?
Over last three decades much work on pricing and hedging stock optionsLittle is known about how investors actually employ stock options What are the levels of long and short open
interest and trading volume by different types of investors?
What are the cross-sectional determinants of option activity?
How did option market activity change during the bubble of the late 1990s and early 2000?
3
This paper
Establish some key facts about option market activity In general During the bubble
Offer conjectures about the facts based upon Discussions with option market
participants Behavioral finance literature
4
Unique Dataset to Establish Facts
Detailed daily open interest and volume information for all CBOE listed options from 1990 through 2001All data broken down by different types of investorsOpen interest: long and shortVolume: buyer/seller initiated and open/close option positionsLimitation: Cannot see combined trades
5
Our Approach
For different types of investors and categories of stocks get daily average Long and short, put and call open interest Call and put buys and sells to open new
positions
Regress four volume categories on stock returns over various past horizonsDo analyses over entire 1990-2001 period and for subperiods
6
Results 1: Option Market Activity Levels
Fact: Non-market makers have about four times more long call than long put open interest
Comment: Surprising because harder to short stocks Conjecture: Analysts make pos. recs. Easier to manage calls
Fact: Non-market makers have more short than long call open interest
Conjecture: Much of the short call open interest is part of covered call positions. Compared to holding stock long, covered calls lose in fewer states of the world and the losses are less severe. Consistent with loss aversion and narrow framing
Fact: Non-market makers have more short than long put open interest
Conjecture: Puts are sold on stocks viewed as undervalued. If stock increases just keep the premium, if it decreases buy the stock at an even lower price
Corroboration: More short put open interest is observed on value than growth stocks
7
Results 2: Cross-Sectional Determinants of Option Activity
Fact: All types of non-market makers buy more calls to open new positions after high past returns (extending up to two years in the past)
Conjecture: Option market participants are trend-chasers, and sentiment about stocks is established over long horizons
Fact: More calls are also sold after high past returns Conjecture: This also represents trend-chasing because
the short calls are part of covered call positions which are viewed as conservative long positions
Fact: More puts are sold to open new positions when past returns on underlying stock are low over past quarter
Conjecture: Contrarian investors like to sell puts on beaten down stocks
8
Results 3: Option Market Activity During the Bubble
Fact: Unsophisticated investors significantly increased buying of calls on growth but not value stocks during the bubbleFact: Sophisticated investors did not increase their call buying during the bubbleFact: None of the investor types increased their put buying during the bubble No evidence that investors used the option
market during the bubble to overcome short-sales constraints (compare to Ofek and Richardson (2003))
9
Outline
DataOption market activity levelsCross-sectional determinants of option market activityOption market activity during the bubbleConclusion
10
DataDaily data on all CBOE listed options from Jan 1990 through Dec 2001Three investor classes: firm proprietary, discount, full-serviceOpen interest: long and short for each investor classVolume: buyer/seller initiated and opening/closing option position (also for each investor class)CRSP/COMPUSTAT: stock returns, shares outstanding, BM ratios
11
Levels of Investor Sophistication
Most sophisticated: Firm proprietary traders (Poteshman and Serbin (2003))Intermediate sophistication: Full-service customers Includes hedge funds Mahani and Poteshman (2003) Pan and Poteshman (2003)
Least sophisticated: Discount customers Odean (1998), Odean and Barber (2000) Mahani and Poteshman (2003) Pan and Poteshman (2003)
12
Measuring Option Market Activity
Measure option open interest or volume on a trade date (t), underlying stock (s), investor class (i), and type of open interest (k):
Similarly for OptionVolPercentageShares
,,, , , ,
1,,
,
100
100
Callss tN
k i Calls j t s j t
jk is t Shares
s t
OpenInterest
OpenInterestPercentageSharesN
13
Table 1: Avg. Daily Open Interest as % of Shares Outstanding
Average aggregate open interest is 0.56% of shares outstanding Turnover 6%/year
Investor Type Long Call Long Put Short Call Short PutNon Market Makers 0.200% 0.047% 0.245% 0.063%
Firm Proprietary 0.042% 0.014% 0.031% 0.010%Discount Customers 0.031% 0.004% 0.023% 0.008%
Full-Service Customers 0.126% 0.029% 0.191% 0.046%
Large Underlying StocksType of Open Interest
14
Table 1: Avg. Daily Open Interest as % of Shares Outstanding
Underlying Stocks Long Call Long Put Short Call Short Put
Large Growth 0.044% 0.015% 0.032% 0.011%Large Value 0.039% 0.019% 0.041% 0.011%
Large Growth 0.039% 0.004% 0.027% 0.009%Large Value 0.032% 0.004% 0.024% 0.010%
Large Growth 0.134% 0.032% 0.211% 0.047%Large Value 0.159% 0.036% 0.190% 0.068%
Type of Open Interest
Panel A: Firm Proprietary Traders
Panel B: Discount Customers
Panel C: Full-Service Customers
15
Profit to Covered Call
Long Stock
Stock Price at Expir.
Short Call
Covered Call
K
Profit
SCurrent
(OTM)
16
Levels of Open InterestAcross the investor classes open interest for long calls is about four times greater than for long puts Somewhat surprising because it is more
costly and difficult to go short than long in the stock market but not in the option market
On the other hand: financial advisers push long stock positions, long calls are easier to manage
17
Levels of Open Interest (Cont.)
More short than long call open interest On surface contradicts idea that investors are relatively
averse to short positions But many short calls are part of covered call positions
Heavily promoted as a conservative long position Consistent with loss aversion and mental accounting
For discount and full-service more short put than long put open interestOver entire 1990-2001 time period there are no major differences across different types of underlying stocks
Largest difference: Full-service customers have more short put open interest on value than growth
18
Table 2: Avg. Daily Open Volume as % of Shares Outstanding
Investor Type Buy Call Buy Put Sell Call Sell PutNon Market Makers 0.00527% 0.00178% 0.00432% 0.00139%
Firm Proprietary 0.00077% 0.00032% 0.00064% 0.00026%Discount Customers 0.00067% 0.00016% 0.00029% 0.00011%
Full-Service Customers 0.00383% 0.00130% 0.00339% 0.00102%
Type of Open VolumeLarge Underlying Stocks
19
Table 2: Avg. Daily Open Volume as % of Shares Outstanding
Underlying Stocks Buy Call Buy Put Sell Call Sell Put
Large Growth 0.00070% 0.00032% 0.00057% 0.00028%Large Value 0.00084% 0.00038% 0.00079% 0.00027%
Large Growth 0.00085% 0.00017% 0.00036% 0.00014%Large Value 0.00056% 0.00014% 0.00026% 0.00010%
Large Growth 0.00391% 0.00133% 0.00359% 0.00107%Large Value 0.00443% 0.00133% 0.00357% 0.00125%
Panel B: Discount Customers Average Daily Open Volume
Panel C: Full-Service Customers Average Daily Open Volume
Panel A: Firm Proprietary Trader Average Daily Open Volume
20
Table 2: Avg. Turnover Time (in Trade Dates)
Investor Type Buy Call Buy Put Sell Call Sell PutFirm Proprietary 55 44 48 38
Discount Customers 46 23 81 71Full-Service Customers 33 23 56 45
Large Underlying StocksType of Open Volume
21
Levels of Option Volume
For both calls and puts there is more open buys than open sells for all investor classes.Since there is more short than long call open interest for full-service customers, they must hold short call positions longer than long call positions Short call positions are held for an average of 56 days Long call positions are held for an average of 33 days Suggests full-service (and discount) customers use
short calls in longer-term investment strategies
22
Cross-Sectional Determinants
Dependent variables: Open buy call volume, open sell call volume, open buy put volume, open sell put volume.Explanatory variables: Returns on the underlying stock over the past week, month, quarter, year, and two yearsControls: BM ratio and volatility of underlying stockReport time-series averages of the intercept and slopes from daily cross-sectional regressions
23
Table III: Large Stock Regressions
Dependent Variable Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
Open Buy Call -0.0002 0.0074 0.0048 0.0023 0.0011 0.0005 0.0000 0.0002 0.0048Volume (-1.69) (5.03) (4.85) (3.96) (2.71) (3.20) (-0.09) (4.08) (5.69)
Open Sell Call -0.0001 0.0064 0.0025 0.0016 0.0010 0.0007 0.0002 0.0002 0.0038Volume (-1.26) (4.78) (2.55) (2.81) (3.03) (5.39) (2.43) (5.18) (6.02)
Open Buy Put -0.0001 -0.0057 -0.0017 0.0000 0.0001 0.0001 0.0002 0.0001 0.0019Volume (-1.39) (-8.04) (-6.23) (-0.01) (0.80) (1.63) (3.82) (5.54) (7.21)
Open Sell Put -0.0001 -0.0074 -0.0015 -0.0003 0.0000 0.0001 0.0001 0.0000 0.0014Volume (-1.76) (-11.36) (-6.47) (-1.63) (0.49) (3.83) (2.51) (4.09) (9.38)
Panel A: Firm Proprietary Traders
Independent Variables
24
Table III: Large Stock Regressions
Dependent Variable Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
Open Buy Call -0.0013 0.0023 0.0007 0.0006 0.0006 0.0008 0.0005 0.0000 0.0062Volume (-16.40) (4.11) (1.83) (2.59) (3.94) (9.49) (8.49) (0.65) (24.17)
Open Sell Call -0.0007 0.0066 0.0009 -0.0002 -0.0002 0.0001 0.0002 0.0000 0.0037Volume (-26.70) (22.79) (6.25) (-1.89) (-2.98) (3.12) (7.03) (2.18) (33.10)
Open Buy Put -0.0003 -0.0005 0.0004 0.0002 0.0001 0.0002 0.0001 0.0000 0.0014Volume (-11.98) (-3.08) (4.12) (2.69) (1.75) (7.83) (5.88) (-1.96) (20.13)
Open Sell Put -0.0003 -0.0023 -0.0008 -0.0004 -0.0001 0.0001 0.0001 0.0000 0.0015Volume (-20.65) (-17.60) (-11.24) (-8.54) (-5.04) (4.44) (7.36) (0.33) (26.96)
Independent Variables
Panel B: Discount Customers
25
Table III: Large Stock Regressions
Dependent Variable Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
Open Buy Call -0.0048 0.0411 0.0089 0.0050 0.0030 0.0021 0.0010 0.0005 0.0360Volume (-13.68) (8.23) (2.64) (2.95) (2.53) (4.98) (4.11) (4.80) (18.28)
Open Sell Call -0.0035 0.0496 0.0145 0.0051 0.0018 0.0015 0.0011 0.0003 0.0285Volume (-13.43) (14.20) (5.61) (3.70) (2.15) (4.45) (4.55) (4.02) (19.02)
Open Buy Put -0.0015 -0.0278 -0.0031 -0.0004 0.0003 0.0009 0.0006 0.0002 0.0117Volume (-14.28) (-17.94) (-3.69) (-0.53) (0.95) (7.32) (5.32) (4.89) (21.25)
Open Sell Put -0.0016 -0.0188 -0.0061 -0.0019 -0.0005 0.0002 0.0007 0.0002 0.0118Volume (-10.01) (-15.35) (-5.61) (-2.74) (-1.65) (1.75) (5.25) (5.93) (18.26)
Independent Variables
Panel C: Full-Service Customers
26
Table IV: Impact of One Standard Deviation Shock
VolumeVariable Rweek-R2years Rweek-Rquarter Ryear-R2years
Open Buy Call Volume 93.99 74.34 19.65
Open Sell Call Volume 102.38 60.55 41.82
Open Buy Put Volume 7.42 -22.34 29.76
Open Sell Put Volume -8.63 -35.36 26.73
Panel A: Firm Proprietary Traders
Dependent Vars. Receiving Positive One Std. Dev. Shock
27
Table IV: Impact of One Standard Deviation Shock
VolumeVariable Rweek-R2years Rweek-Rquarter Ryear-R2years
Open Buy Call Volume 78.28 23.46 54.83
Open Sell Call Volume 30.41 1.28 29.13
Open Buy Put Volume 77.86 25.58 52.28
Open Sell Put Volume -34.82 -77.97 43.15
Panel B: Discount Customers
Dependent Vars. Receiving Positive One Std. Dev. Shock
28
Table IV: Impact of One Standard Deviation Shock
VolumeVariable Rweek-R2years Rweek-Rquarter Ryear-R2years
Open Buy Call Volume 57.18 32.93 24.26
Open Sell Call Volume 63.22 40.54 22.68
Open Buy Put Volume 24.36 -10.53 34.90
Open Sell Put Volume -23.22 -52.16 28.95
Panel C: Full-Service Customers
Dependent Vars. Receiving Positive One Std. Dev. Shock
29
Open Buy Call VolumeDiscount and full-service customers have significantly positive coef. on the return variables for all past horizons Trend-chasing: Daily data, option contracts can be
created and destroyed at will Sentiment developed over extended periods impacts
investment decisions
The impact of past returns is economically large One standard deviation shock to past return variables
increases daily open buy call volume for discount and full-service by 78% and 57%, respectively.
30
Open Sell Call Volume
Full-service customers have positive and significant coefficients on past returns variables. One standard deviation shock increases vol. by 63% Most of volume is from writing covered calls Conservative, income enhancing strategy Prospect theory maintains that investors are more
likely to write calls on their stocks with gains than losses
Less wealthy discount customers are less likely to own underlying stock and the impact of past returns is less clear
31
Open Buy Put VolumeDiscount customers: Buy more (fewer) new puts on underlying stocks that have increased (decreased) in price Expected from prospect theory: Investors are
locking in gains Contrarian investing
Full-service customers: Similar to discount, but clear effect is limited to returns more than three months in pastSince buying puts is not a popular activity, the average option market investor is a trend-chaser (from open buy call regressions)
32
Open Sell Put Volume
There is more selling than buying of putsFor discount and full-service investors the coefficients on past returns are negative over the last quarter and positive over longer horizons Suggests investors believe weakness in stock
is temporary Investors sell puts thinking that if stock price
increases they will just keep premium while if it decreases they are happy to buy the stock at the strike price
33
Option Market Activity During the Bubble
Compare option market activity of the various investor classes before during and after the bubbleDefine Pre-bubble 1990 - 1994 Beginning of bubble 1995 - 1997 Height of bubble 1998 - March 2000 Post-bubble April 2000 - 2001
34
Fig. 2: Price/Book of Russell 1000 Growth Divided by Price/Book of Value
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Dec-9
0
Dec-9
1
Dec-9
2
Dec-9
3
Dec-9
4
Dec-9
5
Dec-9
6
Dec-9
7
Dec-9
8
Dec-9
9
Dec-0
0
Dec-0
1
(Gro
wth
P/B
)/(V
alue
P/B
)
35
Table V: Avg. Daily Open Volume as % of Shares Outstanding (Large Stocks)
Time Period Firm Discount Full-Service1990-1994 0.00091% 0.00047% 0.00432%1995-1997 0.00077% 0.00082% 0.00433%
1998 - March 2000 0.00065% 0.00119% 0.00380%April 2000 - 2001 0.00050% 0.00034% 0.00165%
Investor typeOpen Buy Call Volume
36
Table V: Avg. Daily Open Volume as % of Shares Outstanding (Large Stocks)
Time Period Firm Discount Full-Service1990-1994 0.00034% 0.00014% 0.00141%1995-1997 0.00024% 0.00018% 0.00137%
1998 - March 2000 0.00028% 0.00023% 0.00125%April 2000 - 2001 0.00042% 0.00009% 0.00095%
Open Buy Put VolumeInvestor type
37
Open Buy Call VolumeDiscount customers
Doubles from pre-bubble to beginning of bubble Increases another 50% at height of bubble Declines by a factor of three post-bubble Increased other open volume as well, but during
height of bubble 56% was buying calls
Full-service customers Stable from pre-bubble to beginning of bubble Decreases a bit during height of bubble Cut in half in post-bubble period
Firm proprietary traders The bubble is a non-event
38
Open Buy Put Volume
Well-known that it can be difficult to establish short positions in the stock marketOfek and Richardson (2003) suggest that short-sales constraints were an important contributor to the bubbleBut, we see no major increase in open buy put volume during the bubbleApparently, during a bubble it is not easy to be contrarian
39
Table VI: Large Stock Open Buy Call Volume Regr. for Discount Customers
Time Period Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
1990-1994 -0.00064 0.00215 0.00033 0.00063 0.00064 0.00021 0.00004 -0.00003 0.00457(-13.63) (2.99) (0.65) (2.15) (3.17) (3.30) (0.76) (-2.24) (20.95)
1995-1997 -0.00164 0.00212 -0.00040 -0.00060 -0.00030 0.00073 0.00060 0.00011 0.00940(-18.13) (1.51) (-0.42) (-1.20) (-0.76) (5.06) (6.09) (3.14) (20.84)
1998 - March 2000 -0.00283 0.00615 0.00401 0.00257 0.00206 0.00248 0.00132 -0.00007 0.00892(-10.32) (4.07) (4.21) (4.43) (8.26) (9.65) (7.51) (-1.95) (12.10)
April 2000 - 2001 -0.00034 -0.00196 -0.00068 -0.00025 -0.00002 0.00021 0.00030 0.00004 0.00153(-8.60) (-4.66) (-3.55) (-2.25) (-0.40) (8.01) (7.85) (3.38) (12.36)
Panel B: Discount Customers
Independent Variables
40
Table VI: Large Stock Open Buy Call Volume Regr. for Full-Service Customers
Time Period Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
1990-1994 -0.00519 0.05502 0.01482 0.00937 0.00630 0.00309 0.00092 0.00092 0.04506(-6.78) (5.15) (2.01) (2.53) (2.40) (3.38) (1.71) (4.24) (10.92)
1995-1997 -0.00616 0.04728 0.00586 0.00142 -0.00084 -0.00030 0.00013 0.00011 0.04455(-20.70) (7.06) (1.31) (0.59) (-0.48) (-0.68) (0.42) (0.52) (27.42)
1998 - March 2000 -0.00510 0.02975 0.00795 0.00450 0.00345 0.00407 0.00269 0.00070 0.02740(-12.36) (5.21) (2.43) (3.09) (4.57) (10.00) (8.17) (4.39) (13.90)
April 2000 - 2001 -0.00084 0.00457 -0.00201 -0.00072 -0.00024 0.00064 0.00076 -0.00006 0.00575(-5.99) (2.10) (-2.72) (-1.64) (-1.07) (6.58) (4.96) (-0.67) (16.78)
Panel C: Full-Service Customers
Independent Variables
41
Table VII: Impact on Open Buy Call Volume of One Std. Dev. Shock
Subperiod Rweek-R2years Rweek-Rquarter Ryear-R2years
1990 - 1994 48.18 32.81 15.37
1995 - 1997 36.26 -13.60 49.86
1998 - March 2000 153.91 58.00 95.91
April 2000 - 2001 31.01 -16.86 47.88
1990 - 1994 82.06 54.67 27.39
1995 - 1997 5.80 6.77 -0.97
1998 - March 2000 86.43 32.44 53.99
April 2000 - 2001 14.68 -11.57 26.25
Dependent Vars. Receiving Positive One Std. Dev. Shock
Panel B: Discount Customers
Panel C: Full-Service Customers
42
Open Buy Call Volume Across the Subperiods
Over the whole period there is trend-chasing, but the results are not consistent across the subperiodsThe height of the bubble period definitely stands out Coefficients on past returns are all positive and highly
significant For discount customers a one standard deviation shock to
return variables increases open buy call volume by 154% Longer term past returns are especially important Suggests least-sophisticated investors contributed to run-up in
prices of stocks that did well in the past
43
Open Buy Call Volume Across the Subperiods: Full-service
Table V (looking at open buy call volume unconditionally) makes it look like they did not increase their positive speculation during the bubbleTables VI and VII show that they did not escape the frenzyDuring the height of the bubble they chased better performing stocksPost-bubble there is a dramatic change in behavior for both full-service and discount
Contrarian with respect to short-horizon past returns Impact of longer horizon past returns is much more muted
44
Table IX: Growth/Value Stock Average Daily Open Buy Call Vol.
Time Period Firm Discount Full-Service
1990-1994 0.00105% 0.00070% 0.00633%1995-1997 0.00080% 0.00049% 0.00382%
1998 - March 2000 0.00066% 0.00054% 0.00312%April 2000 - 2001 0.00056% 0.00032% 0.00175%
1990-1994 0.00073% 0.00046% 0.00382%1995-1997 0.00075% 0.00092% 0.00440%
1998 - March 2000 0.00067% 0.00188% 0.00482%April 2000 - 2001 0.00055% 0.00050% 0.00216%
Open Buy Call VolumeInvestor type
Panel A: Large Value Stocks
Panel A: Large Growth Stocks
45
Table IX: Growth/Value Stock Average Daily Open Buy Put Vol.
Time Period Firm Discount Full-Service
1990-1994 0.00045% 0.00021% 0.00185%1995-1997 0.00029% 0.00008% 0.00101%
1998 - March 2000 0.00031% 0.00009% 0.00096%April 2000 - 2001 0.00043% 0.00008% 0.00086%
1990-1994 0.00029% 0.00012% 0.00133%1995-1997 0.00021% 0.00018% 0.00137%
1998 - March 2000 0.00027% 0.00033% 0.00150%April 2000 - 2001 0.00068% 0.00014% 0.00105%
Open Buy Put VolumeInvestor type
Panel A: Large Value Stocks
Panel A: Large Growth Stocks
46
Value Versus Growth: Discount Customers
Buying calls is the most important activity for all subperiodsGrowth Stock Open Buy Call Volume
Doubles from pre-bubble to beginning of bubble Doubles again at height of bubble Declines by a factor of four post-bubble
Value stocks: Did not increase volume that opens new callsThus, option market evidence is that during height of bubble discount customers dramatically increased their speculation that growth stock prices would rise but did not increase speculation that value stock prices would rise
47
Value Versus Growth: Full-Service/Firm Proprietary
Mild increase in open buy call activity on underlying growth stocks during the bubbleA reduction in open buy call activity on underlying value stocks during the bubbleFor firm proprietary traders the bubble period is a non-event in terms of their option activity
48
Table X: Open Buy Call Volume Regressions, 1998-3/2000
Underlying Stocks Intercept Rsameday Rweek Rmonth Rquarter Ryear R2years ln(B/M) Volatility
Large -0.0028 0.0062 0.0040 0.0026 0.0021 0.0025 0.0013 -0.0001 0.0089(-10.32) (4.07) (4.21) (4.43) (8.26) (9.65) (7.51) (-1.95) (12.10)
Large, Growth -0.0085 0.0124 0.0074 0.0047 0.0041 0.0046 0.0014 -0.0017 0.0098(-7.61) (3.94) (4.07) (3.77) (7.25) (7.42) (5.23) (-5.95) (6.69)
Large, Value -0.0005 0.0034 0.0026 0.0010 0.0002 -0.0003 0.0004 0.0002 0.0036(-7.79) (3.53) (4.10) (2.90) (0.66) (-2.56) (3.64) (2.93) (10.91)
Large -0.0051 0.0297 0.0080 0.0045 0.0035 0.0041 0.0027 0.0007 0.0274(-12.36) (5.21) (2.43) (3.09) (4.57) (10.00) (8.17) (4.39) (13.90)
Large, Growth -0.0117 0.0336 0.0065 0.0066 0.0063 0.0068 0.0012 -0.0021 0.0218(-7.80) (4.53) (1.83) (3.06) (5.90) (7.10) (2.43) (-4.77) (9.60)
Large, Value -0.0008 0.0338 0.0120 0.0031 0.0020 -0.0022 0.0037 0.0036 0.0196(-1.79) (4.18) (3.07) (1.56) (1.25) (-2.96) (3.88) (5.09) (7.75)
Panel B: Discount Customers
Panel C: Full-Service Customers
Independent Variables
49
Table XI: Percent Impact of One Standard Deviation Shock
UnderlyingStocks Rweek-R2years Rweek-Rquarter Ryear-R2years
Large Growth 210.95 94.02 116.92Large Value 50.40 46.73 3.67
Large Growth 109.12 48.08 61.04Large Value 51.28 38.41 12.87
Dependent Vars. Receiving Positive One Std. Dev. Shock
Panel B: Discount Customers
Panel C: Full-Service Customers
50
Cross-Sectional Determinants of Open Buy Call Volume During the Bubble
Discount: One standard deviation shock to past return variables results in a 211% increase in open buy call volume on growth stocks and 50% increase on value stocksFull-Service: 109% for growth stocks and 51% for value stocksThere was substantial trend-chasing across the board during the bubble, but it was most intense for Growth stocks Customers of discount brokers
51
Conclusion
Long put positions are relatively unimportant: Only ¼ of long call positions and did not increase during the bubble periodShort call positions are more prevalent than long call positions among non-market makers Covered-calls result in losses in fewer states of
the world than stock positions and only give a lower payoff than stock alone when the stock has increased in price
Consistent with loss aversion and narrow framing
52
Conclusion -- ContinuedShort put positions are more prevalent than long put positions – especially so on value stocksAll three investor classes display trend-chasing behavior in their purchases of calls to open new positions. Returns as far back as 2 years in past matterLeast sophisticated investors dramatically increased purchases of calls to open new positions during the bubble, and this activity was focused in growth stocksNone of the investor groups increased purchases of puts during the bubble. Even when securities are available, investors do not seem to have the courage to bet against a bubble