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Y. Zhang, Y. Xu, S. Yan, “Attention on Options,” (Working Paper Series, presented by Yuzhao Zhang at the OptionMetrics Research Conference 2013)

Y. Zhang, Y. Xu, S. Yan, “Attention on Options,” (Working Paper Series, presented by Yuzhao Zhang at the OptionMetrics Research Conference 2013)

Abstract: This paper investigates the impact of retail investor attention, measured by Google search frequency, on option trading and option pricing as well as stock return volatility. We document a significant positive relation between Google search volume and future option trading activity of retail investors. Moreover, retail investors tend to take more bullish option positions following increased attention. Although option implied volatilities initially rise, the long run impact of Google search volume on option prices is negative, albeit small in magnitude. In contrast, we find a significantly positive and persistent relation between Google search volume and future realized stock return volatility. An option trading strategy of buying high attention delta-hedged straddles and selling low attention delta-hedged straddles generates an annual return of 6.44%, which is uncorrelated with standard risk factors. Our findings suggest that retail investor attention not only affects trading activity but also is a source of noise trader risk.