Active options markets facilitate and stimulate informed trading, which enhances price efficiency. Price efficiency, in turn, increases both managerial incentives and ability to innovate. Consistent with these arguments, we show that firms with greater levels of options trading generate both more patents and patent citations. To alleviate endogeneity concerns, we exploit options listing as a source of exogenous shock to options trading activity. We find that both patents and patent citations increase after options listing for treatment firms relative to a sample of propensity-score-matched control firms. Further split-sample analyses show that the effect of options trading on innovation is more pronounced for firms in competitive industries and firms with higher managerial compensation sensitivity to stock price, consistent with the improved incentives mechanism. Our study is one of the first to examine the effect of derivatives markets on the real economy.