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The Supply and Demand of S&P 500 Put Options

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  • Constantinides, George M.
  • Lian, Lei

Abstract

We model the supply of at-the-money (ATM) and out-of-the-money (OTM) S&P 500 index put options by risk-averse market makers (MMs) and their demand by risk-averse customers who hold the index and a risk free asset and buy puts as downside-risk protection. In equilibrium MMs are net sellers and customers are net buyers of index puts. Consistent with the data, the model-implied net buy of puts by customers is decreasing in the risk and put prices because the shift to the left of the supply curve dominates the shift to the right of the demand curve. The observed time series of the net buy of ATM and OTM puts are consistent with their model-implied counterparts.

Suggested Citation

  • Constantinides, George M. & Lian, Lei, 2021. "The Supply and Demand of S&P 500 Put Options," Critical Finance Review, now publishers, vol. 10(1), pages 1-20, April.
    • Handle: RePEc:now:jnlcfr:104.00000064
    DOI: 10.1561/104.00000064
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    2. Jing Wang & Shuaiqiang Liu & Cornelis Vuik, 2025. "Controllable Generation of Implied Volatility Surfaces with Variational Autoencoders," Papers 2509.01743, arXiv.org.
    3. Scott Mixon & Esen Onur, 2019. "Derivatives pricing when supply and demand matter: Evidence from the term structure of VIX futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1035-1055, September.
    4. Peter H. Gruber & Claudio Tebaldi & Fabio Trojani, 2021. "The Price of the Smile and Variance Risk Premia," Management Science, INFORMS, vol. 67(7), pages 4056-4074, July.
    5. Du Du & Dan Luo, 2019. "The Pricing of Jump Propagation: Evidence from Spot and Options Markets," Management Science, INFORMS, vol. 67(5), pages 2360-2387, May.
    6. Biao Guo & Hai Lin, 2020. "Volatility and jump risk in option returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1767-1792, November.
    7. Todd M. Hazelkorn & Tobias J. Moskowitz & Kaushik Vasudevan, 2020. "Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price," NBER Working Papers 26773, National Bureau of Economic Research, Inc.

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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