Equity Options During the Shorting Ban of 2008

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Abstract
The Securities and Exchange Commission's September 2008 emergency order introduced a near complete shorting ban of some 800 financials traded in the US. This paper provides an empirical analysis of the equity options market during the three months that include the duration of the ban. Using transaction level data from OPRA (The Options Price Reporting Authority) we are able to study the options volume, spreads, pricing measures as well as option trade volume informativeness during the ban. We also consider the put call parity relationship during the ban. We find that during the ban, banned stock option effective and quoted spreads increase as well as the Black-Scholes-Merton volatilities and prices relative to non banned. Using intraday data, we regress future stock returns on lagged signed option trading volume and find that option volume becomes informative during the ban for the banned stocks. Our measure of the violation of American stock put call parity exhibits a significant increase during the ban period and only for the banned stocks. Economic magnitudes of our results often suggest that the impact of the ban on the equity options market was likely not as dramatic as initially thought.

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