Analysis of U.S. Derivative Trading Hedge Fund Returns During the Rapid Increase in Retail Options Trading From 2019 to 2023
Open Access
Author:
Axelrod, Connor
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
J. Randall Woolridge, Thesis Supervisor Brian Spangler Davis, Thesis Honors Advisor
Keywords:
Finance Retail Trading Hedge Fund Derivatives
Abstract:
Retail options trading has become increasingly popular since the introduction of zero-commission brokerage platforms; however, retail traders have historically performed poorly in the options market. A contributing factor to these poor returns has been retail options traders’ tendencies to prefer to trade contracts around high volatility events. Due to the focus on high volatility contracts, retail options traders recently popularized the 0 days to expiration contracts (0DTE).
The excessive size of retail traders’ losses in the market due to trading high volatility events has sparked interest in hedge fund returns, and whether returns have increased due to derivatives-trading hedge funds taking advantage of retail options traders’ losses. To evaluate this phenomenon, we completed a regression analysis of derivative-trading hedge funds’ relative performance to all hedge funds and various variables linked to hedge fund performance to determine if variables such as retail options’ volume have impacted derivative-trading hedge funds’ relative performance. The data did not show a statistically significant correlation between any of the variables tested and derivative-trading hedge funds’ relative performance. Due to the shortage of data on retail trading of options as a result of its relatively new growth, further analysis may yield clearer results once a longer history with more data is available.