Trade Imbalances and Inventory Effects in Long‐term S&P 500 Index Options

Anu Bharadwaj and James B. Wiggins

The Financial Review, 2003, vol. 38, issue 2, 293-309

Abstract: This article investigates how trade imbalances affect prices in the S&P 500 Long‐term Equity Anticipation Securities (LEAPS) market. From 1994 to 1996, put volume was 30 times higher than call volume, and public purchases of puts vastly outnumbered sales. We find that LEAPS put quotes are revised following trade imbalances by more than can be explained by information effects, suggesting that put prices are subject to price pressure or inventory effects. The results suggest market frictions are important in the pricing of options, at least in settings in which arbitrage is particularly costly and public demand leans toward one type of order.

Date: 2003
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