Retail Clientele and Option Returns
Does investor clientele matter for option returns? This paper empirically shows that a higher retail trading proportion (RTP) is related to lower delta-hedged option returns. The phenomenon is more pronounced before earnings announcements and among stocks with more time-varying and positively skewed volatility. The results are robust to a number of fundamental factors. Furthermore, a self-financing investment strategy involving options on low and high RTP stocks generates positive abnormal returns. The results suggest that retail investors speculate and pay a lottery premium on the expected future volatility, resulting in more expensive options in terms of higher implied volatilities. This systematic deviation of option-implied volatility from realized volatility suggests retail clientele as a behavioral-based driving force of volatility risk premium.
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