Retail option traders and the implied volatility surface

Abstract

Retail option traders are typically net purchasers of short-dated options, especially out-of-the-money contracts, whereas they frequently sell long-dated options. Using retail brokerage platform outages as shocks to trading, we find that outages are associated with commensurate demand shocks to implied volatility. Outages produce lower implied volatility on average, with stronger reductions for options that tend to be purchased by retail investors. In contrast, implied volatility increases for long-dated options during outages, consistent with reduced retail writing activity. The findings suggest that retail demand pressure can have important effects on the implied volatility term structure, moneyness curve, and call-put spread.