April 22, 2019
In this paper, we examine how option prices reflect capital gains taxes, if at all. To our knowledge, existing empirical option pricing literature largely ignores the potential impact of taxes on option prices. To assess the effect of taxes on option prices, we exploit a unique setting where “index” options on the S&P 500 Index (SPX) and nearly identical “non-index” options on the exchange traded fund (ETF) tracking the S&P 500 Index (SPY) are subject to different tax treatments.