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"Losing is Optional: Retail Option Trading and Earnings Announcement Volatility"

Event details of ABS Accounting Seminar: Eric So (MIT)
Date 24 May 2022
Time 10:30 -12:00
Location Roeterseilandcampus - building M
Room Amsterdam Business School, REC M4.02

Abstract:*

We document the growth of retail options trading over time and provide evidence that retail investors are drawn to options by anticipated spikes in volatility. Using data on options trades by clientele groups, we show retail investors concentrate their trading around firms’ earnings announcements and incur large losses from bidding up prices for options of firms whose announcements are expected to trigger greater abnormal volatility. Retail losses from bidding up prices are compounded by enormous bid-ask spreads in options ahead of high expected volatility announcements. Retail investors also appear reluctant to close options after announcements with high expected volatility despite volatility quickly subsiding post-announcements. Jointly, these effects translate to retail losses of 5-to-9% around earnings announcements on average, and 10-to-14% for high expected volatility announcements. Market makers are the primary beneficiaries of these patterns, particularly in recent years coinciding with the COVID pandemic, resulting in large capital flows from retail to market makers.

*Co-authored with T. de Silva (MIT) and K. Smith (Stanford University)

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to secbs-abs@uva.nl if your are interested in attending this seminar.

Roeterseilandcampus - building M

Room Amsterdam Business School, REC M4.02

Plantage Muidergracht 12
1018 TV Amsterdam