A Simple Role for Complex Options

76 Pages Posted: 21 Mar 2023 Last revised: 12 Sep 2023

See all articles by Su Li

Su Li

U.S. Securities and Exchange Commission

David K. Musto

University of Pennsylvania - Finance Department

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: March 11, 2023

Abstract

Complex options figure prominently in discussions of the options market, but little is known about their frequency or purpose. We analyze their use with a novel approach that identifies complex trades by grouping the individual legs reported by OPRA into complex packages. We find that complex trades account for over 30 percent of options trading volume and concentrate in vertical, vertical ratio, calendar, and diagonal spread trades for equity options. Straddles, strangles, and other volatility trades comprise only a small fraction of complex trades. Our results indicate that the payoffs of the spread trades are often incidental to their use, because the goal is not the payoff itself but rather an adjustment to the expiration or strike of a simple position.

Keywords: options trading, complex trades, volatility trades

JEL Classification: G12, G23

Suggested Citation

Li, Su and Musto, David K. and Pearson, Neil D., A Simple Role for Complex Options (March 11, 2023). Available at SSRN: https://ssrn.com/abstract=4389657 or http://dx.doi.org/10.2139/ssrn.4389657

Su Li

U.S. Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

David K. Musto (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

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