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.
Original languageEnglish
Publication date2018
Number of pages52
Publication statusPublished - 2018
EventThe 78th Annual Meeting of American Finance Association. AFA 2018 - Philadelphia, United States
Duration: 5 Jan 20187 Jan 2018
Conference number: 78
https://editorialexpress.com/conference/AFA2018/program/AFA2018.html

Conference

ConferenceThe 78th Annual Meeting of American Finance Association. AFA 2018
Number78
Country/TerritoryUnited States
CityPhiladelphia
Period05/01/201807/01/2018
Internet address

Keywords

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

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