Implied Standard Deviations And Put-Call Parity Relations Around Primary Security Offerings

Abstract

This study examines the response of the options market to new security registrations and issuances. Two methods are employed to gauge option market response. The first involves the calculation of implied standard deviations (ISDs) around primary security registration and issuance dates. The second employs American put-call parity to simultaneously evaluate the relationship between put, call and stock prices around these dates. We find a statistically significant mean decrease in relative ISD five trading days before announcement of new stock issuances and a statistically significant mean increase in relative ISD one day before announcement of new debt issuances. Put-call parity tests provide evidence that the options market anticipates stock price decreases prior to announcements of both stock and debt issuance.