Retail Option Traders and the Implied Volatility Surface

53 Pages Posted: 11 May 2022 Last revised: 16 May 2024

See all articles by Gregory W. Eaton

Gregory W. Eaton

University of Georgia

T. Clifton Green

Emory University - Department of Finance

Brian Roseman

Oklahoma State University - Department of Finance

Yanbin Wu

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: April 1, 2024

Abstract

Retail option traders are typically net purchasers of short-dated options, especially out-of-the
money contracts, whereas they frequently sell long-dated options. Using retail brokerage platform
outages as shocks to trading, we find that outages are associated with commensurate demand
shocks to implied volatility. Outages produce lower implied volatility on average, with stronger
reductions for options that tend to be purchased by retail investors. In contrast, implied volatility
increases for long-dated options during outages, consistent with reduced retail writing activity.
The findings suggest that retail demand pressure 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 (April 1, 2024). Available at SSRN: https://ssrn.com/abstract=4104788 or http://dx.doi.org/10.2139/ssrn.4104788

Gregory W. Eaton (Contact Author)

University of Georgia ( email )

Department of Finance
Athens, GA 30602-6254
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

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

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

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