Losers and prospectors in the short‐term options market

Abstract

Intraday data for weekly options are investigated for behavioral biases implied in prospect theory (PT) and cumulative prospect theory (CPT). The results generally support both theories, with losers (winners) observed to be relatively risk‐seeking (averse). On aggregate, losers (winners) overprice (underprice) their contracts and overweight (underweight) the probability of winning. Additionally, the volatility smirk observed in equity options is dampened by PT/CPT biases. The price distortions are time sensitive, especially for losing traders. Losers hold out by transacting later in the day and closer to expiration than their baseline counterparts. This betting‐time effect is absent among winners.