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Margin Requirements and Equity Option Returns

52 Pages Posted: 4 Jun 2016 Last revised: 4 Nov 2016

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School

Michael Hofmann

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Christian Wagner

Copenhagen Business School

Date Written: November 3, 2016

Abstract

In equity option markets, traders face margin requirements both for the options themselves and for hedging-related positions in the underlying stock market. We show that these requirements carry a significant margin premium in the cross-section of equity option returns. The sign of the margin premium depends on demand pressure: If end-users are on the long side of the market, option returns decrease with margins, while they increase otherwise. Our results are statistically and economically significant and robust to different margin specifications and various control variables. We explain our findings by a model of funding-constrained derivatives dealers that require compensation for satisfying end-users’ option demand.

Keywords: equity options, margins, 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 (November 3, 2016). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2789113

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School ( email )

1 Washington Park
Newark, NJ 07102
United States

Michael Hofmann (Contact Author)

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

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

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