Feb

14

Losing is Optional: Retail Option Trading and Expected Announcement Volatility
Tim de Silva, Stanford University
Kevin Smith, Stanford University Graduate School of Business
Eric C. So, Massachusetts Institute of Technology (MIT) - Sloan School
of Management
Date Written: January 14, 2025

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.


Comments

Name

Email

Website

Speak your mind

1 Comment so far

  1. Dean Thomas Parisian on February 27, 2025 1:05 pm

    I haven’t bought a call option since the breakup of MA BELL back in 83-84.

    I’ve sold thousands of call options since then. At 71 I still enjoy taking in premium.

Archives

Resources & Links

Search