The Effects of Option Trading Behavior on Option Prices

This paper investigates the relationship between option trading behavior and pricing patterns. We argue that greater active in options market due to investor overconfidence leads higher volatility larger discrepancies pricing, which may be captured by implied spread skewness. Using two different measures of excess trading, we find activities are correlated ways with volatility, spread, also these relationships exist both over time cross-sectionally. suggest investors tend chase “hot” stocks, as evidence a positive past underlying equity returns. Heavier tends make out-of-the-money call more (less) expensive than at-the-money counterparts (cross-sectionally). Because do not predict future returns, overconfidence, informed seems plausible explanation for our findings.