Equity Short Sales and Options: Complements or Substitutes?
84 Pages Posted: 16 Jul 2015 Last revised: 15 Jan 2017
Date Written: January 14, 2017
This paper studies whether equity short sales and options are complements or substitutes and finds that they are substitutes when the underlying market faces short-selling constraints. This substitutability is associated with implications for stock price volatility and stock market liquidity: Stocks that are subject to short-sale restrictions and have exchange-traded options are more volatile and less liquid than both constrained stocks without options and unconstrained stocks. Traders predominantly use at-the-money options to substitute equity short sales.
Keywords: Trading restrictions, Short selling, Derivatives, Regulation
JEL Classification: G10, G14, G18
Suggested Citation: Suggested Citation