The effect of options on stock prices: 1973 to 1995

I show that the effect of option introductions on underlying stock prices i s best described by a two-regime switching means model whose optimal switch date occurs in 1981. In accordance with previous studies, I find positive abnormal returns for options listed during 1973 to 1980. By contrast, I fin d negative abnormal returns for options listed in 1981 and later. Possible causes for this switch include the introduction of index options in 1982, t he implementation of regulatory changes in 1981, and the possibility that o ptions expedite the dissemination of negative information.