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Does options trading stabilize stock prices? : Evidence from a natural experiment

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  • Kim, Da-Hea

Abstract

We study the relation between options trading volume and stock price volatility, providing causal evidence that options trading stabilizes underlying stock prices. Exploiting the implementation of the Penny Pilot Program as an exogenous shock to options trading, we find that increased options trading reduces stock price volatility. We identify two mechanisms driving the volatility-reducing effect of options trading: (1) providing a buffer for liquidity shocks to stocks, which mitigates extreme price movements, and (2) correcting mispricing, thereby anchoring stock prices closer to their intrinsic values. Our findings support the beneficial role of options trading in enhancing price stability and efficiency.

Suggested Citation

  • Kim, Da-Hea, 2026. "Does options trading stabilize stock prices? : Evidence from a natural experiment," Journal of Banking & Finance, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:jbfina:v:185:y:2026:i:c:s0378426625002328
    DOI: 10.1016/j.jbankfin.2025.107612
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