Margin Requirements and Equity Option Returns

81 Pages Posted: 4 Jun 2016 Last revised: 1 Jul 2021

See all articles by Steffen Hitzemann

Steffen Hitzemann

University of Houston - Department of Finance

Michael Hofmann

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Date Written: June 30, 2021

Abstract

In equity option markets, traders face margin requirements both for the options themselves and for hedging-related positions in the underlying stock market. We show that these requirements carry a significant margin premium in the cross-section of equity option returns. The sign of the margin premium depends on the option's expensiveness: Option returns decrease with margins for expensive options, while they increase for cheap options. Our results are statistically and economically significant and robust to different margin specifications and various control variables. We explain our findings by a model of funding-constrained derivatives dealers who require compensation for satisfying end-users' option demand.

Keywords: equity options, margins, funding liquidity, cross-section of option returns

JEL Classification: G12, G13

Suggested Citation

Hitzemann, Steffen and Hofmann, Michael and Uhrig-Homburg, Marliese and Wagner, Christian, Margin Requirements and Equity Option Returns (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=2789113 or http://dx.doi.org/10.2139/ssrn.2789113

Steffen Hitzemann

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Michael Hofmann

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe
Germany
+49 721 6084 8185 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Christian Wagner (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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