Does the retail clientele matter for option returns? By delta-hedging options and trading straddles, thus allowing a focus on volatility, this paper empirically shows that a higher retail trading proportion (RTP) is related to lower option returns. Long-short portfolios involving options on low and high RTP stocks generate significantly positive abnormal returns. The results suggest that retail investors speculate and pay a lottery premium on the expected future volatility, resulting in more expensive options with higher implied volatilities.

We establish the existence of liquidity risk premium in option returns via sorting analyses and Fama-MacBeth regressions. In leverage-adjusted, hedged returns, the alpha due to liquidity risk ranges from 8.5 to 14.6 basis points per month. In hedged returns unadjusted for leverage, the alpha ranges from 165.9 to 185.1 basis points per month. Compared with the option bid-ask spread, the premium is small in magnitude. In contrast to the findings for stocks and bonds, the liquidity risk premium uncovered in option returns is negative. We explain the negative premium by noting that option end-users write options in net and they might care more about liquidity risk than market makers.

This paper investigates the motive of option trading. We show that option trading is mostly driven by differences of opinion, a finding different from the current literature that attempts to attribute option trading to information asymmetry. Our conclusion is based on three pieces of empirical evidence. First, option trading around earnings announcements is speculative in nature and mostly dominated by small, retail investors. Second, around earnings announcements, the pre-announcement abnormal turnovers of options seem to predict the post-announcement abnormal stock returns. However, once we control for the pre-announcement stock returns, the predictability completely disappears, implying that option traders simply take cues from the stock market and turn around to speculate in the options market. Third, cross-section and time-series regressions reveal that option trading is also significantly explained by differences of opinion. While informed trading is present in stocks, it is not detected in options.

The cash conversion cycle (CCC) is important for fundamental analysis as an indicator of management effectiveness in cash and financing. However, there is a lack of empirical evidence for its implications on asset pricing except for the very recent findings that high CCCs negatively predict stock returns in the U.S. By investigating 47 developed and emerging markets from 1993 to 2018, we find a mild CCC effect across the globe. The Low-minus-High equal-weighted hedge portfolios sorted by components of CCC yield significant Fama-French five-factor alphas ranging from 0.277 to 0.730% per month. Our results are consistent with a mispricing explanation by analyzing earnings prediction, announcement returns around future earnings, and limits of arbitrage although there is also some evidence for a risk-based explanation. Moreover, the CCC effect is stronger in emerging markets than developed markets and for markets with more political risk and less integrated with the global market.