Trading Options and CDS on Stocks under the Short Sale Ban

We examine the interaction between price discovery in banned stocks and the trading and prices of options and CDS during the 2008 short sale ban. We find that among banned stocks, stocks with high open purchased put-call ratios, low synthetic to stock price ratios, or high CDS percentage change underperform in the following five days. We also find options prices are more efficient for un-banned stocks during the ban period. Our results suggest that informed investors trade derivatives in severely deteriorated market conditions, and that derivative prices are more informationally efficient than stock prices during the ban