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Risk preference and trading motivation measurement due to moneyness: evidence from the S&P 500 Index option market

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  • Ting-Huan Chang

Abstract

This article examines the option investors' risk preferences and trading motivations that underlie option trading behaviours using adjusted moneyness when initial moneyness has been influenced by the time-to-maturity effect during the contract period. The statistics for the stationary time series of adjusted moneyness reveal that both call and put option investors essentially prefer to trade At-The-Money (ATM) options. The regression models for testing six hypotheses confirm that call and put option investors have significant risk aversion preferences and expectations of market reversion. Put option investors' trading motivation involves hedging their long and short futures positions by a way of portfolio management, such as the establishment of portfolio insurance or covered options. The motivation underlying the call option trading behaviour is still ambiguous, however.

Suggested Citation

  • Ting-Huan Chang, 2011. "Risk preference and trading motivation measurement due to moneyness: evidence from the S&P 500 Index option market," Applied Financial Economics, Taylor & Francis Journals, vol. 21(14), pages 1049-1057.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:14:p:1049-1057
    DOI: 10.1080/09603107.2011.562160
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    1. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.

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