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

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