Interaction effect of short-sale constraints and differences of opinion on option returns

Abstract

This study examines the interaction effect of short-sale constraints and differences of opinion on returns to writing delta-hedged put options. The effect of short-sale constraints on option returns is significantly greater conditional on highly dispersed opinions. The effect is robust to controlling for exposures to common risk factors and underlying stock characteristics. Our findings suggest that there is a significant interaction effect of differences in opinion and short-sale constraints on the demand for put options, and financial intermediaries require greater compensation for dealing with the increased demand pressure. Also, call options exhibit similar results with the put options in terms of returns to writing delta-hedged options.