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Hedging or speculation? Evidence from the US and Chinese option markets

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  • Xu, Yihao

Abstract

This study examines the divergent roles of options in US and Chinese markets by analyzing their implied volatility (IV) surfaces and dynamic positioning. Using principal component analysis (PCA), I decompose IV surfaces into economically interpretable strategies. In the US, the dominant PCA factor (38.5% variance explained) resembles a strip (OTM put-heavy), reflecting hedging demand. In China, the leading factor (58.9% variance) forms a strap (OTM call-heavy), consistent with speculation. Risk regressions show US strip returns load heavily on market factors, while Chinese OTM calls correlate with bubble-period overconfidence. To address the role of market makers and provide direct evidence, I analyze open interest changes. Results show past market gains predict OTM call demand in China but increase put demand in the US. Furthermore, Delta is a significant negative predictor in the US but insignificant in China, revealing a sophistication gap. These findings suggest US investors use options for tail-risk protection, while Chinese investors use them for leveraged speculation, with market makers amplifying these distinct end-investor motives.

Suggested Citation

  • Xu, Yihao, 2026. "Hedging or speculation? Evidence from the US and Chinese option markets," Finance Research Letters, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finlet:v:90:y:2026:i:c:s1544612325026297
    DOI: 10.1016/j.frl.2025.109380
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