The Index Effect: Evidence from the Option Market

60 Pages Posted: 7 Jan 2021 Last revised: 17 Apr 2023

See all articles by Fabian Hollstein

Fabian Hollstein

Saarland University

Chardin Wese Simen

University of Liverpool Management School

Date Written: January 7, 2021


Equity option markets react significantly to S&P 500 index inclusion news. We document a strong and temporary increase in call option trading volume shortly after the announcement. In the one-day event window, delta-hedged call options yield a statistically significant placebo- and risk-adjusted return of 0.90%. Increases in implied volatility account for a large part of the announcement effect. The effect is stronger for options that provide more leverage and reverses over time. Overall, the results are consistent with the demand-based theory of option pricing.

Keywords: G10, G12, G14

JEL Classification: Delta-Hedged Options, Demand Pressure, Index Effect, Placebo

Suggested Citation

Hollstein, Fabian and Wese Simen, Chardin, The Index Effect: Evidence from the Option Market (January 7, 2021). Available at SSRN: or

Fabian Hollstein

Saarland University ( email )

Saarbrucken, Saarland D-66123

Chardin Wese Simen (Contact Author)

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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