Margin Requirements and Equity Option Returns

106 Pages Posted: 4 Jun 2016 Last revised: 24 Mar 2025

See all articles by Steffen Hitzemann

Steffen Hitzemann

University of Houston - Department of Finance

Michael Hofmann

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

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

Hitzemann, Steffen and Hofmann, Michael and Uhrig-Homburg, Marliese and Wagner, Christian, Margin Requirements and Equity Option Returns (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=2789113 or http://dx.doi.org/10.2139/ssrn.2789113

Steffen Hitzemann (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Michael Hofmann

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe
Germany
+49 721 6084 8185 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Christian Wagner

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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