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Directly measuring early exercise premiums using American and European S&P 500 index options

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Abstract

The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early-exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04% to 5.90% for calls, and from 7.97% to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of negative early exercise premiums. However, a trading simulation shows that traders must be able to trade within the bid-ask spread to profit from these apparent arbitrage opportunities.

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  • Michael J. Dueker & Thomas W. Miller, 2002. "Directly measuring early exercise premiums using American and European S&P 500 index options," Working Papers 2002-016, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2002-016
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    1. Blomeyer, Edward C. & Johnson, Herb, 1988. "An Empirical Examination of the Pricing of American Put Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 13-22, March.
    2. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. 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.
    2. Geoffrey Poitras & Chris Veld & Yuriy Zabolotnyuk, 2009. "European Put-Call Parity and the Early Exercise Premium for American Currency Options," Multinational Finance Journal, Multinational Finance Journal, vol. 13(1-2), pages 39-54, March-Jun.

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    options; Stock market;

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