Put-Call Parity in Equity Options Markets: Recent Evidence

Abstract

There have been various studies of potential violations of put-call parity in US equity options markets, and the purpose of this study is to examine one potential explanation of these anomalous results. Cremers and Weinbaum [1] indicate a potential trading strategy that can obtain excess returns of up to 50 basis points per week, which is quite remarkable. However, none of these studies consider the fact that options markets have historically maintained different trading hours than those of their underlying security markets. While the US stock market has traditionally closed at 3:00 PM CST, options markets have variously closed between 3:10 and 3:02 PM CST over the past two decades. Using over ten million individual options implied volatility estimations since 1996, it is documented that these anomalies have all but disappeared since stock and option markets synchronized their trading hours. Beginning in the late 1990’s, stock prices often move slightly or to a larger degree in “after-hours” trading, enabled by the advent of electronic trading platforms. Options markets that are still open may adjust to subsequent stoc k market movements, although closing stock prices are reported as of 3:00 PM CST. Prior studies may have ignored these effects, and this is the first study to indicate that apparent deviations from put-call parity have decreased markedly over recent years, if they were ever economically significant at all.