The Price Effect of Option Introduction

Authors

  • JENNIFER CONRAD

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    • Graduate School of Business, University of North Carolina. I would like to thank Douglas Diamond, Eugene Fama, Mark Flannery, Kenneth French, Robert Holthausen, Gautam Kaul, Richard Leftwich, Merton Miller, and the referees for helpful comments on previous drafts.


ABSTRACT

This paper examines the price effect of option introduction from 1974 to 1980. The introduction of individual options causes a permanent price increase in the underlying security, beginning approximately three days before introduction. The price effect appears to be associated with introduction, and not announcement, throughout the sample period. Excess returns volatility declines with option introduction. Systematic risk is unchanged. There is a positive relation between the price increase and a measure of activity in the options market.

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