Do Option Markets Undo Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban

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Abstract
We examine the effect of the September 2008 short-sale ban on the derivatives market. Put options and short sales are simultaneously substitutes and complements. Short sellers can instead buy put options. But a willingness to write put options can depend on an ability to hedge by shorting stock. We conclude that complementarity is the stronger effect given the observed diminution in option volumes and increase in option spreads for banned stock relative to unbanned stock during the short sale ban. Midpoint price violations of put-call parity became more frequent during the ban, but the wide spreads limit the potential for arbitrage profits. Similarly, thwarted short sellers do not instead trade single stock futures.

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