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EARLY EXERCISE OF AMERICAN INDEX OPTIONS
Author(s) -
French Dan W.,
Maberly Edwin D.
Publication year - 1992
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1992.tb00793.x
Subject(s) - expiration , call option , index (typography) , asian option , valuation (finance) , stock options , cash , put option , settlement (finance) , actuarial science , valuation of options , economics , business , financial economics , finance , payment , computer science , medicine , world wide web , respiratory system
We show that exercise of American call options on stock indexes frequently occurs before expiration and attribute this early exercise to the “wild card” option that results from the cash settlement exercise process. The wild card represents an “implied option” to sell the index option at the fixed settlement price; it is therefore a put option on the index call option. We derive a simple one‐period valuation model using compound option pricing. Analysis of observed early exercise demonstrates that the wild card feature is a factor influencing early exercise of index options.