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Cited by 16Financial Markets and Investment StrategiesStochastic processes and financial applicationsFinancial Risk and Volatility Modeling

Losing is Optional: Retail Option Trading and Earnings Announcement Volatility

Open access
de Silva, Tim, Smith, Kevin, So, Eric C.·2022·SSRN Electronic Journal
DOI 10.2139/ssrn.4050165
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Abstract

We document the growth of retail options trading and provide evidence that retail investors are drawn to options by anticipated spikes in volatility. Retail investors purchase options in a concentrated fashion before earnings announcements, particularly those with greater expected abnormal volatility. In doing so, retail investors display a trio of wealth-depleting behaviors: they overpay for options relative to realized volatility, incur enormous bid-ask spreads, and sluggishly respond to announcements. These translate to retail losses of 5-to-9% on average, and 10-to-14% for high expected volatility announcements. Market makers are the primary beneficiaries, particularly in recent years coinciding with the COVID pandemic.

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Crossref · 10.2139/ssrn.4050165

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  • The aggregate trading performance of retail option traders is poor, particularly around earnings announcements, in short-term options, and when using complex option strategies.

    “These concerns seem justified in light of recent academic papers which have shown that the aggregate trading performance of retail option traders is poor, particularly around earnings announcements (de Silva, Smith, and So, 2022), in shortterm options (Beckmeyer, Branger, and Gayda, 2023), and when using complex option strategies (Naranjo, Nimalendran, and Wu, 2022).”

    From Striking Out: Biases and Losses of Retail Option Traders (2024) · cites this paper as de Silva, Smith, and So, 2022

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Authors
de Silva, T., Smith, K., & So, E. C.
Affiliations
  • Stanford University (US)
  • Massachusetts Institute of Technology (US)
ORCID
Venue
SSRN Electronic Journal
Publisher
Elsevier BV
Published
2022
ISSN
1556-5068 (ISSN-L)
DOI
10.2139/ssrn.4050165
OpenAlex
W4225965695
Cited by
16
References
3
Citations by year
2025: 7 · 2024: 1 · 2023: 4 · 2022: 2 · 2021: 2
Type
posted content
Language
en
Open access
Locations
SSRN Electronic Journal (publishedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Risk and Volatility Modeling
Keywords
earnings announcements, abnormal volatility, retail investor behavior, option pricing, bid-ask spread, market makers, COVID-19 pandemic

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