Retail options trading is rising rapidly, driven by factors such as the growth of retail brokers, the popularity of social media, and more flexible working hours. Alongside this trend, there has been an increased interest in research on retail options trading behavior. We recently discussed retail options trading and its link to gambling behavior.
Reference [1] continues this line of research by examining how retail trading reshapes the implied volatility (IV) surface dynamics. The authors utilize OPRA and Nasdaq data for this study. To isolate the effect of retail options trading, they apply a difference-in-differences approach around retail broker outages, 82 events from 2019 to 2021, comparing implied volatility between high-retail and low-retail stocks, during versus pre-outage periods.
The authors pointed out,
Option market volume has dramatically increased in recent years, driven by an influx of retail investors. Our analysis reveals that retail option trading is particularly concentrated in call, short-dated, and out-of-the-money call options. We examine the effects of retail trading on option market volume and implied volatility, using brokerage outages as exogenous shocks to retail option trading. Our findings indicate that net buying volume by retail investors significantly declines during outages for the types of options they prefer. In contrast, net buying volume rises during outages for long-dated options, consistent with retail investors tending to write rather than purchase longer maturity options.
The paper’s central finding is that retail investor demand pressure significantly impacts option implied volatility. We find that implied volatility significantly decreases during retail brokerage outages, and in particular for call, OTM, and short-dated options. In contrast, implied volatility significantly increases for long-dated options. The effect of retail brokerage outages on implied volatility aligns with the shifts in net retail volume and points towards a significant role for retail investors in shaping the IV surface. Additional robustness analysis indicates that the outage results are unique to the outage period, are not driven by a small number of the most actively traded options, and continue to hold for alternative option trading data.
In short, retail investors systematically buy short-dated, out-of-the-money (especially calls) and sell long-dated options, creating predictable pressure across the surface. When retail trading activity is reduced during brokerage outages, IV falls for short-dated and OTM options but rises for long-dated options.
This paper contributes to a better understanding of retail options trading and shows how retail traders can materially affect the implied volatility surface.
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References
[1] Eaton, Gregory W., T. Clifton Green, Brian S. Roseman, and Yanbin Wu (2025). Retail Option Traders and the Implied Volatility Surface. SSRN 4104788
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