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How Do Short-Sale Costs Affect Put Options Trading? Evidence from Separating Hedging and Speculative Shorting Demands

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  • Tse-Chun Lin
  • Xiaolong Lu

Abstract

We find that put options trading volume and bid-ask spreads both increase with equity lending fees. However, we also find that put options trading volume decreases with lending fees for banned stocks during the 2008 Short-Sale Ban period, when only options market makers could short. By separating the speculative demand of short sellers from the hedging demand of options market makers in the lending market, our results provide a thorough analysis of the interaction between the options market and the equity lending market. We also shed light on the substitutability/complementarity between put options volume and short interest shown in the literature.

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  • Tse-Chun Lin & Xiaolong Lu, 2016. "How Do Short-Sale Costs Affect Put Options Trading? Evidence from Separating Hedging and Speculative Shorting Demands," Review of Finance, European Finance Association, vol. 20(5), pages 1911-1943.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:5:p:1911-1943.
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    References listed on IDEAS

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    1. Melissa Porras Prado & Pedro A. C. Saffi & Jason Sturgess, 2016. "Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3211-3244.
    2. Adam C. Kolasinski & Adam Reed & Jacob R. Thornock, 2013. "Can Short Restrictions Actually Increase Informed Short Selling?," Financial Management, Financial Management Association International, vol. 42(1), pages 155-181, March.
    3. Richard B. Evans & Christopher C. Geczy & Adam V. Reed, 2009. "Failure Is an Option: Impediments to Short Selling and Options Prices," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1955-1980, May.
    4. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.
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    Cited by:

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    2. Yi‐Wei Chuang & Wei‐Che Tsai & Pei‐Shih Weng & Chi Yin, 2021. "Do put warrants unwind short‐sale restrictions? Further evidence from the Taiwan Stock Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(3), pages 325-348, March.
    3. Atmaz, Adem & Basak, Suleyman, 2019. "Option prices and costly short-selling," Journal of Financial Economics, Elsevier, vol. 134(1), pages 1-28.
    4. Lin, Zih-Ying & Chang, Chuang-Chang & Wang, Yaw-Huei, 2018. "The impacts of asymmetric information and short sales on the illiquidity risk premium in the stock option market," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 152-165.
    5. Marc Bohmann & Vinay Patel, 2020. "Information Leakage in Energy Derivatives around News Announcements," Published Paper Series 2020-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    6. Choy, Siu Kai & Wei, Jason, 2020. "Liquidity risk and expected option returns," Journal of Banking & Finance, Elsevier, vol. 111(C).
    7. Patel, Vinay & Putniņš, Tālis J. & Michayluk, David & Foley, Sean, 2020. "Price discovery in stock and options markets," Journal of Financial Markets, Elsevier, vol. 47(C).
    8. Mohrschladt, Hannes & Schneider, Judith C., 2021. "Option-implied skewness: Insights from ITM-options," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    9. George D. Cashman & David M. Harrison & Hainan Sheng, 2022. "Short selling and options trading: A tale of two markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 313-338, June.
    10. Ramachandran, Lakshmi Shankar & Tayal, Jitendra, 2021. "Mispricing, short-sale constraints, and the cross-section of option returns," Journal of Financial Economics, Elsevier, vol. 141(1), pages 297-321.
    11. Du, Brian & Fung, Scott, 2018. "Directional information effects of options trading: Evidence from the banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 149-168.

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