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

Michael Dueker and Thomas W. Miller ()
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Thomas W. Miller: https://www.business.msstate.edu/directory/twm75

No 2002-016, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: options; Stock market (search for similar items in EconPapers)
Date: 2002
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Journal Article: Directly measuring early exercise premiums using American and European S&P 500 Index options (2003)
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DOI: 10.20955/wp.2002.016

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