Losing is Optional: Retail Option Trading and Expected Announcement Volatility

65 Pages Posted: 29 Mar 2022 Last revised: 13 Jun 2023

See all articles by Tim de Silva

Tim de Silva

Massachusetts Institute of Technology (MIT), Economics, Finance, Accounting (EFA), Students

Kevin Smith

Stanford University Graduate School of Business

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 8, 2023

Abstract

We document the growth of retail options trading and provide evidence that retail investors are drawn to options by anticipated spikes in volatility. Retail investors purchase options in a concentrated fashion before earnings announcements, particularly those with greater expected abnormal volatility. Comparing across asset markets, we also find retail investors disproportionately trade options over stocks as anticipated announcement volatility increases. In doing so, retail investors display a trio of wealth-depleting behaviors: they overpay for options relative to realized volatility, incur enormous bid-ask spreads, and sluggishly respond to announcements. These translate to retail losses of 5-to-9% on average, and 10-to-14% for high expected volatility announcements.

Keywords: Retail trading, option pricing, earnings announcements, volatility

JEL Classification: G11, G12, G40, G50

Suggested Citation

de Silva, Tim and Smith, Kevin and So, Eric C., Losing is Optional: Retail Option Trading and Expected Announcement Volatility (June 8, 2023). Available at SSRN: https://ssrn.com/abstract=4050165 or http://dx.doi.org/10.2139/ssrn.4050165

Tim De Silva (Contact Author)

Massachusetts Institute of Technology (MIT), Economics, Finance, Accounting (EFA), Students ( email )

Cambridge, MA 02139
United States

Kevin Smith

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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