Trading behavior of option investors

In this project, I investigate what extent and in what manner option trading is affected by the past price movements of the underlying stocks. An option is a contract that gives the investor the right, but not the obligation, to buy or sell an underlying asset (e.g., a stock) at a specific price on or before a certain date. 

 

The research will reveal for the first time whether the buying and selling of options is affected by past price movements in stocks. Second, the research will provide an impetus for further behavior-based research into option trading. Third, the study will illuminate the different trading behaviors of institutional and individual investors. Fourth, the work will show how option trading activities exert price pressure on options, especially before scheduled news events such as earnings announcements. In addition, hedge fund managers could exploit the contrarian or momentum trading in options. Market makers could capitalize on the momentum or contrarian trading patterns for the purpose of inventory management. Regulators would be able to apply the insights to fine-tune the regulation framework.