Animal spirits on steroids: Evidence from retail options trading in India

Vikas Agarwal, Pulak Ghosh, Nagpurnanand R. Prabhala and Haibei Zhao

No 25-09, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: We analyze a market-wide panel dataset on retail options trading from India, a market with an 80% share in option contracts traded worldwide. Retail traders both concentrated in and dominate index options trading. They exhibit short-term speculative behavior with significant day trading, short- duration directional bets especially as options converge to 0DTE and make significant losses. Three natural experiments indicate that financial constraints and lottery-like preferences likely shape investor behavior. An exogenous increase in the supply of short-maturity options induces trading. Lot-size increases and delivery margins trying to curb speculation are offset by shifts to small ticket-size, riskier options. While financial market participation increases welfare in canonical household finance models, it can also entrench speculative behavior that is difficult to undo.

Keywords: Options; Retail Options Trading; Speculation; Skewness; Lotteries; Gambling; Addiction; Financial Inclusion; Stock Market Participation (search for similar items in EconPapers)
JEL-codes: D14 D18 G14 G15 G18 G50 G53 O16 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-fle, nep-inv, nep-mst and nep-sea
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