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Synthetic long stock and option trading: Evidence from stock splits

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  • Yifan Liu
  • Louis R. Piccotti

Abstract

We theoretically and empirically identify synthetic long stock as an alternative driver of option trading. Our model proves that the use of synthetic long stocks by capital‐constrained traders contributes to at‐the‐money (ATM) option trading. Using an event study based on stock splits, we document empirical evidence consistent with the model's predictions. ATM option trading declines after stock splits, and these declines are more pronounced for stock splits with higher stock split factors and for more illiquid stocks but are less pronounced for more illiquid options. Our study implies that option trading can occur even without information or opinion dispersion.

Suggested Citation

  • Yifan Liu & Louis R. Piccotti, 2025. "Synthetic long stock and option trading: Evidence from stock splits," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 48(1), pages 321-350, March.
    • Handle: RePEc:bla:jfnres:v:48:y:2025:i:1:p:321-350
    DOI: 10.1111/jfir.12404
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