Retail Option Traders and the Implied Volatility Surface

48 Pages Posted: 11 May 2022 Last revised: 7 Sep 2022

See all articles by Gregory W. Eaton

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance

T. Clifton Green

Emory University - Department of Finance

Brian Roseman

Oklahoma State University - Department of Finance

Yanbin Wu

Emory University - Goizueta Business School; University of Florida - Department of Finance, Insurance and Real Estate

Date Written: September 1, 2022

Abstract

Retail investors dominate option trading in recent years. Individuals are net purchasers of options, particularly call, short-dated, and out-of-the-money options, although they tend to write long-dated puts. Retail brokerage outages are associated with reduced implied volatility overall, and the effect is stronger for options purchased by retail investors. In contrast, implied volatility increases for long-dated options during outages, consistent with reduced retail writing activity. The findings highlight the importance of retail demand pressure on the implied volatility surface and suggest that retail trading can have important effects on the implied volatility term structure, moneyness curve, and call-put spread.

Keywords: Retail Traders, Option Markets, Implied Volatility

JEL Classification: G11, G12, G14, G40

Suggested Citation

Eaton, Gregory W. and Green, T. Clifton and Roseman, Brian and Wu, Yanbin, Retail Option Traders and the Implied Volatility Surface (September 1, 2022). Available at SSRN: https://ssrn.com/abstract=4104788 or http://dx.doi.org/10.2139/ssrn.4104788

Gregory W. Eaton (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

T. Clifton Green

Emory University - Department of Finance ( email )

1300 Clifton Rd.
Atlanta, GA 30322-2710
United States
404-727-5167 (Phone)
404-727-5238 (Fax)

Brian Roseman

Oklahoma State University - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078
United States

Yanbin Wu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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