Short-Sale Constraints and Option Trading: Evidence from Reg SHO

56 Pages Posted: 15 Aug 2014 Last revised: 18 Aug 2015

See all articles by Sheng‐Syan Chen

Sheng‐Syan Chen

National Chengchi University

Yi-Wen Chen

National Chengchi University

Robin K. Chou

National Chengchi University

Date Written: August 15, 2015

Abstract

Examining a set of pilot stocks experiencing releases of short-sale price tests by Regulation SHO, we find a significant decrease in put volume and price pressure of options of the pilot stocks after Regulation SHO. Violations of put-call parity and information content of option trading significantly decrease after Regulation SHO. The relaxation of short-sale constraints on equity markets allows traders to switch part of their trading demand from option markets to stock markets and hence significantly affects option market quality and spot and option market relations. Thus, it is important to consider the cross-market effects of short-sale regulations.

Keywords: Option Trading; Pilot Program; Reg SHO; Short-sale

JEL Classification: G12, G14, G18

Suggested Citation

Chen, Sheng-Syan and Chen, Yi-Wen and Chou, Robin K., Short-Sale Constraints and Option Trading: Evidence from Reg SHO (August 15, 2015). Available at SSRN: https://ssrn.com/abstract=2480886 or http://dx.doi.org/10.2139/ssrn.2480886

Sheng-Syan Chen

National Chengchi University

No. 64, Sec. 2, ZhiNan Rd., Wenshan District
Taipei 116, 116
Taiwan

Yi-Wen Chen (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886 921-589-735 (Phone)

Robin K. Chou

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091 ext. 81016 (Phone)

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