Investor Sentiment and Its Impact on Equity and Index Option Trading Strategies: A Study on the Role of Market Psychology in Financial Decision – Making

This study examines the influence of investor sentiment on equity and index option trading strategies and its role in financial decision-making. Investor sentiment represents the collective psychological outlook, expectations, and emotional responses of investors toward financial markets. While traditional financial theories assume that investors behave rationally, behavioral finance suggests that psychological biases such as fear, greed, herd behavior, and overconfidence frequently influence investment decisions. These behavioral factors can significantly impact market movements, trading strategies, and derivative pricing. The primary objective of this research is to analyze how investor sentiment affects trading behavior in equity and index options markets. The study focuses on identifying how traders respond to sentiment indicators such as market volatility, social media influence, and psychological biases while making trading decisions. Primary data for the study was collected through a structured questionnaire distributed among investors and traders with varying levels of financial knowledge and market experience. The responses were analyzed using percentage analysis and descriptive interpretation to understand behavioral patterns in trading strategies. The findings indicate that investor sentiment plays a significant role in shaping option trading behavior, particularly during periods of high volatility and market uncertainty. Many traders adjust their strategies based on sentiment indicators such as the Volatility Index (VIX), put-call ratios, and market news. The study highlights the importance of integrating behavioral finance insights with traditional financial analysis to improve trading strategies and risk management.