Losing is optional: retail option trading and expected announcement volatility

Abstract

We document the growth of retail options trading and provide evidence that retail investors are drawn to options by anticipated spikes in volatility. Retail investors purchase options in a concentrated fashion before earnings announcements, particularly those with greater expected abnormal volatility. Comparing across asset markets, we also find retail investors disproportionately trade options over stocks as anticipated announcement volatility increases. In doing so, retail investors display a trio of wealth-depleting behaviors: they overpay for options relative to realized volatility, incur enormous bid–ask spreads, and do not close their positions until weeks after announcements. These translate to retail losses of 5–9 percent on average, and 10–14 percent for high expected volatility announcements.