Option Trading and Returns versus the 52-Week High and Low

TY - JOUR

T1 - Option Trading and Returns versus the 52-Week High and Low

AU - Choy, Siu Kai

AU - Wei, Jason

N1 - Funding Information: Financial supports from King's College London, and the Social Sciences and Humanities Research Council of Canada are gratefully acknowledged. We thank two anonymous referees for their constructive comments and helpful suggestions and the Editor, Michael Goldstein, for his support and guidance. We also thank the copyeditor, Kathy Mikell, for her professional assistance. Publisher Copyright: © 2022 The Eastern Finance Association.

PY - 2022/8

Y1 - 2022/8

N2 - We show that option traders suffer from the anchoring effect induced by the stock price’s 52-week high or low. Specifically: 1) trading of all options decreases as the stock price approaches its 52-week high or low; 2) the buy-sell imbalance for calls decreases and that for puts increases as the stock price approaches its 52-week high, and the opposite occurs as the stock price approaches its 52-week low; and 3) the subsequent delta-hedged option returns for both calls and puts are higher as the stock price approaches its 52-week extreme.

AB - We show that option traders suffer from the anchoring effect induced by the stock price’s 52-week high or low. Specifically: 1) trading of all options decreases as the stock price approaches its 52-week high or low; 2) the buy-sell imbalance for calls decreases and that for puts increases as the stock price approaches its 52-week high, and the opposite occurs as the stock price approaches its 52-week low; and 3) the subsequent delta-hedged option returns for both calls and puts are higher as the stock price approaches its 52-week extreme.

UR - http://www.scopus.com/inward/record.url?scp=85131887825&partnerID=8YFLogxK

U2 - http://doi.org/10.1111/fire.12310

DO - http://doi.org/10.1111/fire.12310

M3 - Article

SN - 1540-6288

VL - 57

SP - 691

EP - 726

JO - Financial Review

JF - Financial Review

IS - 3

ER -