The value of the wildcard option in cash-settled American index options

Dennis J. Lasser and Joshua D. Spizman

Journal of Financial Markets, 2016, vol. 28, issue C, 116-131

Abstract: We estimate the size of the wildcard premium embedded in cash-settled American-style options. Similar to simulation results reported by Fleming and Whaley (1994), we find the wildcard premium significantly impacts the valuations of American-style put and call options. Furthermore, we find that the wildcard premium as a percentage of price is somewhat larger than the Fleming-Whaley simulation in periods of low implied volatility but not in periods of high volatility. Finally, we show a correlation between the size of the wildcard premium and overnight S&P 100 overnight returns.

Keywords: Cash settled options; S&P 100 index; Option pricing; American-style; European-style (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:28:y:2016:i:c:p:116-131

DOI: 10.1016/j.finmar.2015.09.002

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