Margin Requirements and Equity Option Returns
106 Pages Posted: 4 Jun 2016 Last revised: 24 Mar 2025
Date Written: June 30, 2021
Abstract
In equity option markets, traders face margin requirements on their portfolios of options and underlying stocks. We show that individual equity option returns carry a margin premium, which is determined by an option's contribution to dealers' overall margin requirements. The margin premium is a statistically and economically significant component of the cross-section of option returns, and robust in various subsamples and after controlling for established drivers of option returns. Our empirical analysis is guided by a model of funding-constrained derivatives dealers who require compensation for satisfying end-users' demand.
Keywords: equity options, margin requirements, financial intermediaries, funding liquidity, cross-section of option returns
JEL Classification: G12, G13
Suggested Citation: Suggested Citation