WORKING PAPERS

Options Market Makers, with Jianfeng Hu and Dmitriy Muravyev

Options market makers (OMMs) are essential as they provide continuous two-sided quotes and facilitate most option trades. However, little is known about how they perform or manage risk. We use unique account-level data for KOSPI 200 index options and futures to identify and study 43 OMMs. While OMMs’ strategies are surprisingly heterogeneous, they share several common features. First, OMMs are highly profitable and make money on most days. Second, although option investors are commonly believed to regularly delta-hedge in the underlying, we find that only four out of 43 OMMs delta-hedge and study delta-hedgers’ strategies. Finally, OMMs quickly revert inventory positions to the desired level by providing liquidity with limit orders. Overall, OMMs primarily rely on active inventory rebalancing to manage risk.

Retail Trading on Anomalies, with Ekkehart Boehmer

We study retail investor activity in the extreme portfolios of well-known cross-sectional anomalies. In general, retail investors tend to trade in the opposite direction of anomalies (buying stocks in the short portfolios and selling stocks in the long portfolios), both before and after the anomaly variables become public information. However, we do not find evidence that retail trading is the cause of mispricing and subsequent return predictability. Stocks with high retail participation do not appear to be more mispriced after controlling for firm size. Instead of pushing prices away from fundamentals, contrarian retail trades are likely to provide liquidity to arbitrageurs who trade on the anomalies. In addition, we uncover a subset of retail trades those executed by retail short sellers which exploit anomaly information correctly. In particular, retail short sales help to correct mispricing of overvalued stocks in the short portfolios of value-versus-growth anomalies.

• Presented at: 
  FMA European Conference 2022, Spanish Finance Forum 2022, University of Florence 4th International Week, CUNEF Universidad, Singapore Management University