Are Individuals Really Contrarian? Evidence from Stock Option Trades

Abstract

This paper analyzes stock option trading records of online retail bank investors to assess individual net buy positions in poor versus well performing stock. We study stock options since this is a unique investment category that allows disentangling the heavily-debated contrarian versus emotional bias explanations for individual trading decisions. We find that individuals, on average, are contrarian when taking both bullish (long call and short put) and bearish (long put and short call) option positions in stock they do not own. However, bullish positions are driven to a larger extent by very-short term (i.e. prior day) contrarian signals compared to bearish positions. Further, we identify optimism as a key psychological feature explaining the contrarian investment behavior. Our study provides novel insights in the dynamics of individual investors’ option trading decisions and in the distinctive roles of cognitive biases underlying this process.