In this project, the goal is to investigate the presence of mispricing in option markets and its underlying causes. More in particular, a possible candidate for implied volatility movements, namely the subreddit r/WallStreetBets, is investigated through sentiment analysis, and its correlation with IV is tested and conclusions are to be drawn concerning the impact that r/WallStreetBets has on option mispricing.
Whereas there are plentiful studies analyzing the relationship existing between the stock sentiment on well-known platforms such as Google and Twitter and financial markets/indices (see Mao, Counts, and Bollen (2011)), there is a significant lack of research conducted on r/WallStreetBets, a platform which is nevertheless increasingly affecting the world of Finance. Hence, the project will aim to provide an answer to this gap by employing a novel database of the 50 most popular S&P 500 stocks on the platform throughout 2021. In terms of results, the project does not find statistical evidence in favour of an effect of r/WallStreetBets’ sentiment on Implied Volatility. At the same time, the results are neverthless able to provide insights for both industry (due to the economic significance of the L/S strategy implemented) and academia (by analyzing, empirically, one of the most influential yet overlooked trends of recent years: r/WallStreetBets).