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Directly measuring early exercise premiums using American and European S&P 500 Index options
Author(s) -
Dueker Michael,
Miller Thomas W.
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10063
Subject(s) - index (typography) , arbitrage , style (visual arts) , economics , profit (economics) , ask price , financial economics , actuarial science , finance , history , computer science , microeconomics , world wide web , archaeology
The Chicago Board Options Exchange concurrently listed European‐style and American‐style optionson the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allowsfor 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 from7.97 to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of theearly 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 profitfrom these apparent arbitrage opportunities. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:287–313,2003