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Flipping the Arbitrage: How Option Prices Imply Negative Interest Rates

December 5, 2025

We exploit the European-style characteristic of index options to show that trading these options requires investors to lay arbitrage opportunities on the table. This methodology is extremely clean, requiring only the option prices and exercise prices. Our results for the S&P 500 index options are consistent over approximately 23 million options in a 27-year period. We estimate the minimum cost to investors of this phenomenon is about $10.3 billion a year or about $37 a contract. Our findings are confirmed in two other popular index options, the Nasdaq 100 and the VIX. We also detect similar indications in American-style options on the SPY and Apple. These results show that to trade options investors are required to pay prices that if hedge would return a negative interest rate.

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