Short-Sale Constraints and Options Trading: Evidence from Reg SHO

Yi-Wen Chen, Sheng-Syan Chen and Robin K. Chou

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 5, 1555-1579

Abstract: We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

Date: 2020
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