Attention on Volatility and Options
62 Pages Posted: 17 Sep 2013 Last revised: 5 Apr 2017
Date Written: March 15, 2017
We document a positive and persistent relation between retail investor attention, as measured by Google search volume, and future realized stock return volatility. The relation implies a profitable option trading strategy of purchasing high attention delta-neutral straddles and selling low attention delta-neutral straddles; this strategy earns a significant weekly return of 2.36% and is uncorrelated with common risk factors as well as the firm level variance risk premium. Examination of option trading activities of different investor groups following increased Google search shows that retail option investors benefit most from increasing stock volatility. Our evidence strongly supports theories of noise trader risk.
Keywords: Google search volume, investor attention, volatility, option trading, option pricing
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation