Failure is an Option: Impediments to Short Selling and Options Prices

46 Pages Posted: 1 Aug 2003  

Richard B. Evans

University of Virginia - Darden School of Business

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

David K. Musto

University of Pennsylvania - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 2005

Abstract

Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. Some of the value of failing passes through to option prices: when failing is cheaper than borrowing, the relation between borrowing costs and option prices is significantly weaker. The remaining value is profit to the market maker, and its ability to profit despite the usual competition between market makers appears to result from a cost advantage of larger market makers at failing.

Suggested Citation

Evans, Richard B. and Reed, Adam V. and Geczy, Christopher and Musto, David K., Failure is an Option: Impediments to Short Selling and Options Prices (December 7, 2005). EFA 2003 Glasgow. Available at SSRN: https://ssrn.com/abstract=423881 or http://dx.doi.org/10.2139/ssrn.423881

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Adam V. Reed (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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