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A Closer Look at the Disposition Effect in U.S. Equity Option Markets

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  • Kelley Bergsma
  • Andy Fodor
  • Emily Tedford

Abstract

The authors explore whether the disposition effect occurs in U.S. equity option markets. The disposition effect implies past winning securities will be undervalued and past losing securities will be overvalued. By adapting Grinblatt and Han’s unrealized capital gains proxy to the option markets, the authors document a significant relationship between option capital gains overhang and option returns. They also find open interest decreases as option capital gains overhang increases, consistent with a disposition effect in U.S. equity options. This evidence contributes to the emerging literature on behavioral finance in derivative securities.

Suggested Citation

  • Kelley Bergsma & Andy Fodor & Emily Tedford, 2020. "A Closer Look at the Disposition Effect in U.S. Equity Option Markets," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(1), pages 66-77, January.
    • Handle: RePEc:taf:hbhfxx:v:21:y:2020:i:1:p:66-77
    DOI: 10.1080/15427560.2019.1615913
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    Cited by:

    1. Bali, Turan G. & Beckmeyer, Heiner & Moerke, Mathis & Weigert, Florian, 2021. "Option return predictability with machine learning and big data," CFR Working Papers 21-08, University of Cologne, Centre for Financial Research (CFR).

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