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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.

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We examine how the September 2008 short sale restrictions and the accompanying confusion and regulatory uncertainty impacted equity option markets. We find that the short sale ban is associated with dramatically increased bid-ask spreads for options on banned stocks. In addition, synthetic share prices for banned stocks become significantly lower than actual share prices during the ban. We find similar results for synthetic share prices of hard-to-borrow stocks, suggesting that the dislocation in actual and synthetic share prices is attributable to the increased hedging costs for options on banned stocks during the short sale ban.This ban is terrible for option market makers. It will kill options trading because you cannot price options fairly. You cannot buy a call or sell a put and hedge them.

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