Retail Option Traders and the Implied Volatility Surface

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