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

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  • Michael Dueker
  • Thomas W. Miller Jr.

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. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:287–313, 2003

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:3:p:287-313
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    Cited by:

    1. Weihan Li & Jin E. Zhang & Xinfeng Ruan & Pakorn Aschakulporn, 2024. "An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1117-1153, July.
    2. 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.
    3. 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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