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Options Trading and the Bid-Ask Spread of the Underlying Stocks

Mark Fedenia and Theoharry Grammatikos
The Journal of Business
Vol. 65, No. 3 (Jul., 1992), pp. 335-351
Stable URL: http://www.jstor.org/stable/2353269
Page Count: 17
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Options Trading and the Bid-Ask Spread of the Underlying Stocks
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Abstract

This study shows that options listing significantly affects the spreads on the underlying stock. We identify a trade-off between the benefits of increased liquidity and the cost of informational externalities. Highly liquid stocks tend to have spread increases, while illiquid stocks experience spread decreases. The effect occurs in concert with nonlisting volatility changes. The spread changes do not appear to be caused by shifts in liquidity between the stock and options market. Often, spread changes are large enough to affect significantly the cost of equity capital.

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