The Market Impact of Retail Options Trading

The Evolution of Retail Options Trading

Author

Nam Nguyen
June 28, 2026 • Estimated Reading Time: 5 minutes

Retail trading, especially in the options market, which has traditionally been the domain of institutional traders, has received relatively little attention. However, with the rapid growth of educational content, AI, social media, and commission-free trading platforms, this is no longer the case.

Today, retail investors account for a significant share of options market volume and are changing market dynamics. In this issue, we examine the characteristics of retail options trading and how it is reshaping the options market.

In this issue:

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How Retail Investors Trade Options

Options trading is often thought of as a professional’s domain. However, with the advent of online trading platforms, retail traders now have access to the same tools and information as professional traders. This has changed the dynamics of the options market, as retail traders can now trade options on a level playing field with professionals.

However, a question remains to be answered: do retail options traders have the same knowledge, experience, and discipline as the professionals? Reference [1] examined this question

Findings

  • The paper documents a rapid increase in retail participation in the U.S. options market in recent years.

  • It also finds a sharp rise in payment for order flow (PFOF) paid by wholesalers to retail brokerages for executing customer option orders.

  • The authors develop a novel measure of retail options trading using transaction-level data and new regulatory reporting requirements.

  • The measure closely tracks other proxies for retail trading activity and declines significantly during brokerage outages and trading restrictions.

  • The study finds that retail investors strongly prefer inexpensive weekly options.

  • These options have very wide quoted bid-ask spreads, averaging approximately 12%, making them costly to trade.

  • The paper finds that retail investors frequently fail to exercise call options optimally before ex-dividend dates.

  • Market makers and arbitrageurs profit from these mistakes through nearly risk-free "dividend play" arbitrage strategies.

  • The study reports that retail trading now accounts for over 60% of total U.S. options trading volume, with nearly 90% of PFOF originating from three major wholesalers.

The findings are very interesting. In the next paper, we’ll look at how retail traders have changed the volatility term structure and dynamics of the option market.

Reference

[1] S. Bryzgalova, A. Pavlova, T. Sikorskaya, Retail Trading in Options and the Rise of the Big Three Wholesalers, SSRN 4065019

The Impact of Retail Options Trading on the Implied Volatility Surface

Retail options trading is rising rapidly, driven by factors such as the growth of retail brokers, the popularity of social media, and more flexible working hours. Alongside this trend, there has been an increased interest in research on retail options trading behavior.

Reference [2] examines how retail trading reshapes the implied volatility (IV) surface dynamics. The authors utilize OPRA and Nasdaq data for this study. To isolate the effect of retail options trading, they apply a difference-in-differences approach around retail broker outages, 82 events from 2019 to 2021, comparing implied volatility between high-retail and low-retail stocks, during versus pre-outage periods.

Findings

  • The paper documents a sharp increase in option trading activity driven by retail investors.

  • It finds that retail trading is concentrated in call options, short-dated options, and out-of-the-money call options.

  • The authors use brokerage outages as exogenous shocks to identify the impact of retail trading on option markets.

  • Retail buying volume falls significantly during outages for the option contracts most favored by retail investors.

  • In contrast, buying volume for long-dated options increases during outages, consistent with retail investors typically being net sellers of these contracts.

  • The study finds that retail demand has a significant impact on option implied volatility.

  • Implied volatility declines during brokerage outages, particularly for call, short-dated, and out-of-the-money options.

  • Implied volatility increases for long-dated options during outages, reflecting reduced retail option-writing activity.

  • The findings suggest that retail demand influences not only the level of implied volatility but also the term structure, moneyness curve, and call-put spread of the implied volatility surface.

  • Robustness tests confirm that these effects are specific to brokerage outages and are not driven by a small subset of actively traded options or by the choice of trading dataset.

In short, retail investors systematically buy short-dated, out-of-the-money (especially calls) and sell long-dated options, creating predictable pressure across the surface. When retail trading activity is reduced during brokerage outages, IV falls for short-dated and OTM options but rises for long-dated options.

This paper contributes to a better understanding of retail options trading and shows how retail traders can materially affect the implied volatility surface.

Reference

[2] Eaton, Gregory W., T. Clifton Green, Brian S. Roseman, and Yanbin Wu (2025). Retail Option Traders and the Implied Volatility Surface. SSRN 4104788

Closing Thoughts

Taken together, these two papers show that retail investors have become a major force in the options market, influencing not only trading volume but also option pricing. Their preference for short-dated, out-of-the-money call options has measurable effects on implied volatility, while payment for order flow and trading behavior have reshaped market microstructure. For practitioners, understanding retail option flows is becoming increasingly important, as they now represent a significant driver of option prices and volatility dynamics.

Additional Reading

For further discussion on retail trading, refer to the previous issues:

Educational Video

Quant Radio: The Changing Signal in Options Markets

In this podcast, Quantopian discusses a recent paper examining how retail participation has fundamentally changed the information content of options markets. For more than two decades, unusually high option-to-stock trading volume served as a reliable signal of informed institutional trading. However, the explosion of commission-free trading and retail options activity after 2020, particularly in short-dated out-of-the-money calls, created a structural break that reversed this relationship. The speakers argue that many traditional volume-based signals no longer work because they have become dominated by retail order flow rather than informed institutional trading.

The podcast also explains why market microstructure remains as important as ever. While aggregate option volume has become less informative, relative price measures—such as implied volatility spreads between matched calls and puts—continue to provide robust signals because they are grounded in arbitrage relationships and are less affected by retail trading. The discussion concludes that successful quantitative strategies must adapt to evolving market structure, and that understanding the mechanics of modern options markets is becoming increasingly important as retail participation and zero-day-to-expiration (0DTE) options continue to reshape market dynamics.

Educational Webinar

I will be presenting a webinar on VIX and options trading, jointly with Matthias Bouquet and Marco Santanché. The webinar will take place on June 30, 2026, at 2:00 p.m. ET.

Please use the link below to register.

Volatility Weekly Recap

The figure below shows the term structures for the VIX futures (in colour) and the spot VIX (in grey).

Markets were mixed as weakness in technology stocks offset improving AI sentiment. Inflation data met expectations, while stronger-than-expected Micron earnings provided only temporary support to semiconductor shares.

Treasury yields and oil prices declined during the week, easing inflation concerns. Gold and cryptocurrencies also weakened, with Bitcoin extending its recent underperformance.

On the volatility front, both the spot VIX and VIX futures rose slightly during the week but remained in contango. Roll yield, however, continued to decline and is now hovering just above zero.

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