The New Normal: How COVID-19 Redefined the Options Market Landscape
Project by Polygence alum Lindsay
Project's result
From 2020 to 2023, the average daily volume (ADV) in the options market doubled from ~20 million to ~42 million contracts, marking unprecedented growth during the pandemic years, surpassing the ADV growth from 2000 to 2020. This surge was driven by the entry of retail investors, shifting the market focus toward smaller trades (1–10 contracts), short-dated options (weekly and 0DTE), and stock/ETF options. Pre-pandemic, options trading was dominated by institutional investors, characterized by larger trade sizes, longer expiration dates, and low VIX-PCR correlations, reflecting strategic, long-term investment behaviors. During the pandemic, retail investors significantly altered market dynamics. This is evidenced by the results of the regression analysis and lagged PCR values: higher VIX-PCR correlations and spikes in bearish sentiment that occurs around 1 week before volatility increases. Furthermore, data collected exhibited rapid growth in smaller trade sizes, shorter expiration dates, and also even more surges in stock/ETF options. Post-pandemic, while ADV continued growing steadily (reaching 55 million contracts by early 2025), market dynamics stabilized, reflecting a balance between retail and institutional activity. Regression analysis shows a shift toward less extreme behaviors, indicating a more democratized and complex market landscape. This transformation highlights the pandemic’s lasting impact, including broader accessibility for retail investors and a shift in the interplay between retail and institutional behaviors. However, it underscores the need for regulatory frameworks that ensure market stability while maintaining accessibility, as the options market enters a new, more intricate era.
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Summary
This study investigates how the COVID-19 pandemic conditions influenced the dynamics between retail and institutional option trading. Before the pandemic, institutional trades influenced the options market; However, the pandemic led to a surge in retail participation, and an option trading behavior unseen before dominated the market. Post-pandemic, while retail activity remained prominent, market dynamics stabilized. Key factors such as lowered commission costs, heightened market uncertainty, and unique circumstances, such as lockdowns, led to a cascade of events that ultimately catalyzed the growth of retail option trading by reducing traditional barriers prior to COVID-19 like financial knowledge gaps and high capital requirements. By employing and analyzing lagged and regression models, this paper examines the effects of VIX metrics, S&P 500 performance, and their joint effect during different time periods on the CBOE put-call ratio. Furthermore, data on average daily volumes, expiration dates, trade sizes, and underlying assets of options are assessed to identify activity patterns of retail and institutional participants. These methods provide a detailed analysis of how market dynamics evolved across three distinct periods: before, during, and after the pandemic. This paper offers insights into how trading volume, volatility, and behaviors were reshaped during this transformative period, and the big picture of the option market evolution.
Clay
Polygence mentor
JD/PhD Juris Doctorate and Doctor of Philosophy candidate
Subjects
Quantitative, Business, History, Social Science
Expertise
corporate finance, asset pricing, macroeconomics, financial history, law and economics
Lindsay
Student
Hi my name is Lindsay Zhu! I am currently writing a research paper about options market dynamics called The New Normal: How COVID-19 Redefined the Options Market Landscape. I chose to work on this project, because recently I've seen a surge in the trend of option trading on various major exchange sites, social media, and in the people around me. Furthermore, options, an asset mainly traded by institutional investors, have been more widely accessed due to COVID-19. These observations I made prompted me to investigate the market and analyze this new market entrant in the options market: Retail investors. After completion, I would like to publish my findings as well as share them on conferences to further spread my insight on the democratization of the options market.
Graduation Year
2026
Project review
“I learned more than I ever expected from this experience, and I feel like I’ve grown tremendously both personally and professionally. This project challenged me to step out of my comfort zone, and as a result, I developed skills and confidence I didn’t realize I was capable of achieving. One of the most rewarding aspects was discovering a deeper passion for research. While I enjoyed it before, this experience has heightened my curiosity and appreciation for the process. I’ve grown to love diving into complex topics, uncovering new insights, and piecing together solutions.”
About my mentor
“My experience with my mentor has been incredibly valuable and transformative. Clay provided guidance that not only helped me overcome my challenges, but also changed the way I view finance and data science. From the very beginning, my mentor created a very engaging environment that prompted me to ask questions, share ideas, and grow. What stood out most was their genuine interest in my success. They encouraged me to think critically and explore creative solutions to problems. This mentorship has equipped me with knowledge and insights that I can carry forward in my career. Overall, the mentorship experience was highly enriching, and I deeply appreciate the time and effort my mentor invested in helping me grow both professionally and personally.”