Who Profits From Trading Options?

51 Pages Posted: 16 Jun 2021

See all articles by Jianfeng Hu

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Antonia Kirilova

Singapore Management University - Lee Kong Chian School of Business

Seongkyu Gilbert Park

Hong Kong Polytechnic University

Doojin Ryu

Sungkyunkwan University

Date Written: June 15, 2021

Abstract

We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. We find that retail investors in particular favor a consistent trading strategy: approximately 70% of retail investors predominantly hold simple one-sided positions in only one class of options, while institutional investors are more likely to use multiple strategies with a range of complexity. Accordingly, we use trading style complexity as an ex ante measure of trading skills to demonstrate its significant effect on investment performance. We find that retail investors using simple strategies are losing to the rest of the market. For both retail and institutional investors, volatility trading earns the highest return, and risk neutral strategies deliver the highest Sharpe ratio. We conclude that these style effects are persistent and cannot be explained by systematic risk exposure or known behavioral biases.

Keywords: Options, institutional investors, retail investors, trading styles, volatility

Suggested Citation

Hu, Jianfeng and Kirilova, Antonia and Park, Seongkyu and Ryu, Doojin, Who Profits From Trading Options? (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3867129 or http://dx.doi.org/10.2139/ssrn.3867129

Jianfeng Hu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

Antonia Kirilova

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Seongkyu Park

Hong Kong Polytechnic University ( email )

M850, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
+852 2766 4073 (Phone)

HOME PAGE: http://https://sites.google.com/site/skgilbertpark/

Doojin Ryu

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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