Options and the Bubble

Abstract

Many believe that a bubble existed in Internet stocks in the 1999 to 2000 period, and that short-sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. In the presence of such short-sale constraints, option and stock prices could decouple during a bubble. Using intraday options data from the peak of the Internet bubble, we find almost no evidence that synthetic stock prices diverged from actual stock prices. We also show that the general public could cheaply short synthetically using options. In summary, we find no evidence that short-sale restrictions affected Internet stock prices. Copyright 2006 by The American Finance Association.

The impact of naked short selling on the securities lending and equity market

“…26 Mayhew and Vassil (2005) document that options do not reduce short sale constraints. Other studies include: Brunnermeier and Nagel (2004), Lakonishok, Lee, and Poteshman (2004), Lamont and Stein (2004), Mayhew and Mihov (2004), Ofek, Richardson, and Whitelaw (2004), Battalio and Schultz (2005), Bris, Goetzmann, and Zhu (2007), and Danielsen, Van Ness, and Warr (2007). sample have options listed (during the sample period). We note that the effect of listed options on sample stocks is likely to minimize the impact of changes to the list of eligible stocks, thereby reducing the magnitude of our results.…”

Stock and option market divergence in the presence of noisy information

“…For American options, we need to consider the early exercise premium. Following the analytical valuation formulas appearing in previous literature (e.g., Ofek, Richardson, and Whitelaw (2004), and Battalio and Schultz (2006)), we can rewrite Eq. (1) as:…”

Options resilience during extreme volatility: Evidence from the market events of May 2010

“…OPRA also provides a consolidated list for the underlying securities for every month that includes the underlying names and tickers for which options were traded or quoted during that month. See Battalio and Schultz (2006) for a more detailed discussion of the characteristics of the OPRA data. Table 1 details the number of stocks with at least one quote or trade for call and put options in each of the first seven trading days of May 2010.…”