A Case Study of a Failed Call Options Market

Abstract

Three years after the introduction of exchange‐traded options on the American scene, a call options market was made with ten popular common stocks in Singapore in early 1977. Only calls were traded and no puts were introduced. After six months of trading actively, volume dwindled, and the market was withdrawn in early 1980. Three currency options markets introduced in 1987 continues to thrive at the time of this study. The reason for the demise of the call options market is mainly the significant mispricing of the contracts as most contracts were systematically above the theoretical fair prices. Low volatility in the spot market after the calls were introduced, availability of alternative speculative instrument for traders, high transaction costs and the lack of knowledge about the complexity of options trades are suggested as reasons for the failure of the market. As a new options market has been introduced again in March, 1993, it is worthwhile to learn from the past.

Citation

Ariff, M., Chan, P.K. and Johnson, L.W. (1995), "A Case Study of a Failed Call Options Market", Managerial Finance, Vol. 21 No. 10, pp. 41-58. https://doi.org/10.1108/eb018538