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The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets

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  • Useong Shin

Abstract

Put-call parity is a terminal-payoff identity; quoted residuals against traded futures are near zero. Yet enforcing parity is path-dependent, exposing arbitrageurs to daily settlement, margin, and finite capital. Using minute-level NBBO data on S&P 500 and Russell 2000 options, I extract option-implied discount factors, compare them with the OIS curve, and construct an annualized carry gap. A reduced-form specification centered on a volatility times sqrt(tau) path-risk term links the carry gap to implementation risk, trading frictions, and financial conditions, with coefficient signs stable across leave-one-year-out validation. The carry gap is an implementation wedge invisible in price space but systematic in carry space.

Suggested Citation

  • Useong Shin, 2026. "The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets," Papers 2604.19604, arXiv.org, revised Apr 2026.
    • Handle: RePEc:arx:papers:2604.19604
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