Investor Sentiment and Option Price Discovery: Evidence from Combination Option Trading

Author : Chin-Ho Chen

Abstract :This study examines the role of investor sentiment in reversal and conversion option trading and its impact on the price discovery for futures market. Using intraday transaction data from Taiwan's index option market, our results show that traders are more likely to benefit from conversion trades during market optimism while reversal trades are more profitable during pessimistic periods. Also, we f ind that that the net volume between reversal and conversion trades predict futures market returns, with the predictive power being associated with investor sentiment. When the market is optimistic, a decrease in futures returns follows increased conversation trades. Conversely, the return effect becomes less during periods of pessimism-induced reversal trades. Our research highlights the importance of combination option trades in price discovery.

Keywords :Investor sentiment, price discovery, reversal trade, conversion trade.

Conference Name :International Conference on Advance Accounting and Finance (ICAAF-25)

Conference Place Fukuoka, Japan

Conference Date 14th Jul 2025