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Margin Requirements and Equity Option Returns

Publication: Research - peer-reviewPaper

In equity option markets, traders face margin requirements both for the options themselves and for hedging-related positions in the underlying stock market. We show that these requirements carry a significant margin premium in the cross-section of equity option returns. The sign of the margin premium depends on demand pressure: If end-users are on the long side of the market, option returns decrease with margins, while they increase otherwise. Our results are statistically and economically significant and robust to different margin specifications and various control variables. We explain our findings by a model of funding-constrained derivatives dealers that require compensation for satisfying end-users’ option demand.

Publication information

Original languageEnglish
Publication date2016
Number of pages52
StatePublished - 2016
Event - Paris, France

Conference

ConferenceThe 14th International Paris December Finance Meeting
Number14
CountryFrance
CityParis
Period20/12/201620/12/2016
Internet address

    Keywords

  • Equity options, Margins, Funding liquidity, Cross-section of option returns

ID: 45578753