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The value of the wildcard option in cash-settled American index options

Author

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  • Lasser, Dennis J.
  • Spizman, Joshua D.

Abstract

We estimate the size of the wildcard premium embedded in cash-settled American-style options. Similar to simulation results reported by Fleming and Whaley (1994), we find the wildcard premium significantly impacts the valuations of American-style put and call options. Furthermore, we find that the wildcard premium as a percentage of price is somewhat larger than the Fleming-Whaley simulation in periods of low implied volatility but not in periods of high volatility. Finally, we show a correlation between the size of the wildcard premium and overnight S&P 100 overnight returns.

Suggested Citation

  • Lasser, Dennis J. & Spizman, Joshua D., 2016. "The value of the wildcard option in cash-settled American index options," Journal of Financial Markets, Elsevier, vol. 28(C), pages 116-131.
    • Handle: RePEc:eee:finmar:v:28:y:2016:i:c:p:116-131
    DOI: 10.1016/j.finmar.2015.09.002
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    References listed on IDEAS

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    1. Rubinstein, Mark, 1985. "Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 through August 31, 1978," Journal of Finance, American Finance Association, vol. 40(2), pages 455-480, June.
    2. Paul Dawson, 2000. "The intraday distribution of volatility and the value of wildcard options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(4), pages 307-320, April.
    3. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    4. Paul Dawson, 1994. "Comparative pricing of American and European index options: An empirical analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 363-378, May.
    5. Michael Dueker & Thomas W. Miller Jr., 2003. "Directly measuring early exercise premiums using American and European S&P 500 Index options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(3), pages 287-313, March.
    6. Sheikh, Aamir M., 1991. "Transaction Data Tests of S&P 100 Call Option Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 459-475, December.
    7. Fleming, Jeff & Whaley, Robert E, 1994. "The Value of Wildcard Options," Journal of Finance, American Finance Association, vol. 49(1), pages 215-236, March.
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    More about this item

    Keywords

    Cash settled options; S&P 100 index; Option pricing; American-style; European-style;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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