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Retail clientele and option returns

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  • Choy, Siu-Kai

Abstract

Does the retail clientele matter for option returns? By delta-hedging options and trading straddles, thus allowing a focus on volatility, this paper empirically shows that a higher retail trading proportion (RTP) is related to lower option returns. Long-short portfolios involving options on low and high RTP stocks generate significantly positive abnormal returns. The results suggest that retail investors speculate and pay a lottery premium on the expected future volatility, resulting in more expensive options with higher implied volatilities.

Suggested Citation

  • Choy, Siu-Kai, 2015. "Retail clientele and option returns," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 26-42.
    • Handle: RePEc:eee:jbfina:v:51:y:2015:i:c:p:26-42
    DOI: 10.1016/j.jbankfin.2014.11.004
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    3. Xingguo Luo & Doojin Ryu & Libin Tao & Chuxin Ye, 2024. "Price monotonicity violations during stock market crashes: Evidence from the SSE 50 ETF options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 533-554, March.
    4. Han-Sheng Chen & Sanjiv Sabherwal, 2023. "The Effects of Option Trading Behavior on Option Prices," JRFM, MDPI, vol. 16(7), pages 1-24, July.

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    More about this item

    Keywords

    Delta-hedged option returns; Lottery premium; Retail investors; Speculation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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