Margin Requirements and Equity Option Returns

Steffen Hitzemann, Michael Hofmann, Marliese Uhrig-Homburg, Christian Wagner

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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.
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.

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

Cite this

Hitzemann, S., Hofmann, M., Uhrig-Homburg, M., & Wagner, C. (2016). Margin Requirements and Equity Option Returns. Paper presented at The 14th International Paris December Finance Meeting, Paris, France.
Hitzemann, Steffen ; Hofmann, Michael ; Uhrig-Homburg, Marliese ; Wagner, Christian. / Margin Requirements and Equity Option Returns. Paper presented at The 14th International Paris December Finance Meeting, Paris, France.52 p.
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Hitzemann, S, Hofmann, M, Uhrig-Homburg, M & Wagner, C 2016, 'Margin Requirements and Equity Option Returns' Paper presented at, Paris, France, 20/12/2016 - 20/12/2016, .

Margin Requirements and Equity Option Returns. / Hitzemann, Steffen; Hofmann, Michael; Uhrig-Homburg, Marliese; Wagner, Christian.

2016. Paper presented at The 14th International Paris December Finance Meeting, Paris, France.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Margin Requirements and Equity Option Returns

AU - Hitzemann,Steffen

AU - Hofmann,Michael

AU - Uhrig-Homburg,Marliese

AU - Wagner,Christian

PY - 2016

Y1 - 2016

N2 - 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.

AB - 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.

KW - Equity options

KW - Margins

KW - Funding liquidity

KW - Cross-section of option returns

KW - Equity options

KW - Margins

KW - Funding liquidity

KW - Cross-section of option returns

M3 - Paper

ER -

Hitzemann S, Hofmann M, Uhrig-Homburg M, Wagner C. Margin Requirements and Equity Option Returns. 2016. Paper presented at The 14th International Paris December Finance Meeting, Paris, France.