Betting on Elusive Returns: Retail Trading in Complex Options

56 Pages Posted: 30 Mar 2023 Last revised: 8 Mar 2024

See all articles by Andy Naranjo

Andy Naranjo

University of Florida

Mahendrarajah Nimalendran

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

Yanbin Wu

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

Date Written: March 21, 2023

Abstract

We study the role of financial product complexity in retail investor trading. We find retail trading in complex options surged with the introduction of zero-commissions, and these traders prefer strategies with high volatility, embedded leverage, and lottery-like features. Model-free subjective expectations of volatility extracted from their trades show significant optimism bias. Importantly, their trades on average yield negative returns of -16.4% over three days, with losses increasing with complexity. Our findings suggest that retail investors do not fully grasp the risk/returns trade-offs in complex strategies, and they are lured by their inherent leverage and promise of lottery-like payoffs.

Keywords: Retail Investors, Financial Product Complexity; Zero-commissions; Complex Options; Earnings Announcement

JEL Classification: G14; G23; G24; G28

Suggested Citation

Naranjo, Andy and Nimalendran, Mahendrarajah and Wu, Yanbin, Betting on Elusive Returns: Retail Trading in Complex Options (March 21, 2023). Available at SSRN: https://ssrn.com/abstract=4404393 or http://dx.doi.org/10.2139/ssrn.4404393

Andy Naranjo

University of Florida ( email )

Gainesville, FL
United States

Mahendrarajah Nimalendran

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

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

Yanbin Wu (Contact Author)

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

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

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