Retail Option Traders and the Implied Volatility Surface
48 Pages Posted: 11 May 2022 Last revised: 7 Sep 2022
Date Written: September 1, 2022
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: Suggested Citation