Can Volatility-Based Options Strategies Outperform AI-Suggested Strategies?

Presenter: REED BURKETT-SCHNEIDER

Faculty Sponsor: Zaur Rzakhanov

School: UMass Boston

Research Area: Finance

Session: Poster Session 2, 11:30 AM - 12:15 PM, 163, C23

ABSTRACT

I will be researching the rise in retail stock options trading volume since the pandemic and exploring how investors can potentially benefit from it through effective volatility strategies. According to Barclays Research, retail-driven call buying demand has doubled, while institutional call demand has remained flat. This shift has led to many call options becoming overvalued, creating opportunities for volatility-based trading strategies. Options are generally priced according to the market's anticipated future implied volatility (Maverick,2024), and with most retail traders buying out-of-the-money options with limited days to expiration, implied volatility rises, pushing up prices. This phenomenon isn’t grounded in rational decision-making but is largely driven by inexperienced investors aiming for quick profits. In this research, I will examine whether these trends persist today and, if so, explore how targeted volatility strategies can capitalize on the resulting market inefficiencies. Through a structured methodology, I will discuss specific tactics such as short-straddles, volatility spread analysis, and weekly market evaluations using volatility rankings. By analyzing the performance of these strategies and comparing them to AI-suggested portfolios, I aim to uncover practical approaches for navigating the evolving options landscape, paving the way for a deeper understanding of how volatility-based strategies can potentially yield profitable results.

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