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What Motivates Retail Options Traders?

September 9, 2022

“Our central finding is that retail investors are significantly more likely to buy options ahead of announcements with higher expected abnormal announcement volatility (EAV). To measure expected announcement volatility (EAV), we use a measure based on the implied volatility of options from OptionMetrics, given option prices are dependent on the expected volatility of the underlying stock in the future. The intuition for our measure is that the prices of short-term options expiring immediately after an earnings announcement are more sensitive to the amount of announcement volatility and long-term options expiring after the announcement. As a result, we can back out the expected announcement volatility by comparing the prices of these two options. For example, the difference in price between two Apple (AAPL) options with the same strike – one expiring the day before the earnings announcement and the other the day after – captures the expected volatility at the announcement.”

Leveraging OptionMetrics data in their analysis, Tim de Silva, Kevin Smith, and Eric C. So’s research paper, “Losing is Optional: Retail Option Trading and Earnings Announcement Volatility” examines how retail traders trade around earnings. Read the full article on their research in Traders Magazine below.