Single Stock Call Options as Lottery Tickets: Overpricing and Investor Sentiment

Luiz Félix*, Roman Kräussl, Philip Stork

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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The authors investigate whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman's [1992] cumulative prospect theory (CPT). They hypothesize that these options are expensive because investors overweight small probability events and overpay for positively skewed securities (i.e., lottery tickets). The authors find that overweighting of small probabilities embedded in the CPT explains the richness of out-of-the money single stock calls better than other utility functions. Nevertheless, overweighting of small probabilities events is less pronounced than suggested by the CPT, is strongly time varying, and most frequent in options of short maturity. The authors find that fluctuations in overweighting of small probabilities are largely explained by the sentiment factor.

Original languageEnglish
Pages (from-to)385-407
Number of pages23
JournalJournal of Behavioral Finance
Issue number4
Early online date22 Jan 2019
Publication statusPublished - 2019


  • Call options
  • Cumulative prospect theory
  • Investor sentiment
  • Risk-neutral densities

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