Abstract
We provide new evidence on the effects of position limits on options for ETFs on the S&P 500 (SPY contracts), based on market reactions to the pilot program (amendment to CBOE Rule 4.11), whereby position limits were temporarily suspended. Removal of position limits during the pilot period did not harm the underlying markets in terms of volatility. While option volume shocks enhance SPY return volatility shocks, these effects are alleviated when position limits are suspended. Furthermore, during the pilot period, price efficiency improved, based on the market tracking performance of the ETFs.
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