The Supply and Demand of S&P 500 Put Options

Posted: 19 Aug 2015 Last revised: 28 Dec 2015

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Lei Lian

University of Massachusetts Amherst - Isenberg School of Management

Date Written: July 11, 2015

Abstract

We document that the skew of S&P500 index puts is non-decreasing in the disaster index and risk-neutral variance, contrary to the implications of no-arbitrage models. Our model resolves the puzzle by recognizing that, as the disaster risk increases, customers demand more puts as insurance while market makers become more credit constrained in writing puts. The skew steepens because the credit constraint is more sensitive to out-of-the-money puts. Consistent with the data, the model also predicts that the skew is increasing in the broker-dealers' liability-to-asset ratio; and the net buy of puts is decreasing in the disaster index, variance, put price, and liability-to-asset ratio.

Keywords: S&P 500 options; option supply; option demand; market maker credit constraints; Value-at-Risk; implied volatility skew; net buy; disaster risk; variance risk

JEL Classification: G11, G12, G23

Suggested Citation

Constantinides, George M. and Lian, Lei, The Supply and Demand of S&P 500 Put Options (July 11, 2015). Fama-Miller Working Paper; Chicago Booth Research Paper No. 15-38. Available at SSRN: https://ssrn.com/abstract=2645858 or http://dx.doi.org/10.2139/ssrn.2645858

George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7258 (Phone)
773-752-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lei Lian

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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