Directly measuring early exercise premiums using American and European S&P 500 Index options
✍ Scribed by Michael Dueker; Thomas W. Miller Jr.
- Publisher
- John Wiley and Sons
- Year
- 2003
- Tongue
- English
- Weight
- 210 KB
- Volume
- 23
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
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