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The impact of position limits on options trading

Author

Listed:
  • Switzer, Lorne N.
  • Tu, Qiao

Abstract

We provide new evidence on the effects of position limits on options for ETFs on the S&P 500 (SPY contracts), based on market reactions to the pilot program (amendment to CBOE Rule 4.11), whereby position limits were temporarily suspended. Removal of position limits during the pilot period did not harm the underlying markets in terms of volatility. While option volume shocks enhance SPY return volatility shocks, these effects are alleviated when position limits are suspended. Furthermore, during the pilot period, price efficiency improved, based on the market tracking performance of the ETFs.

Suggested Citation

  • Switzer, Lorne N. & Tu, Qiao, 2024. "The impact of position limits on options trading," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612323013417
    DOI: 10.1016/j.frl.2023.104969
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    More about this item

    Keywords

    Option trading; Position limits; Informational efficiency; Volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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