Who Profits From Trading Options?

Abstract

We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. We find that retail investors in particular favor a consistent trading strategy: approximately 70% of retail investors predominantly hold simple one-sided positions in only one class of options, while institutional investors are more likely to use multiple strategies with a range of complexity. Accordingly, we use trading style complexity as an ex ante measure of trading skills to demonstrate its significant effect on investment performance. We find that retail investors using simple strategies are losing to the rest of the market. For both retail and institutional investors, volatility trading earns the highest return, and risk neutral strategies deliver the highest Sharpe ratio. We conclude that these style effects are persistent and cannot be explained by systematic risk exposure or known behavioral biases.