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Index Options (index + option)
Terms modified by Index Options Selected AbstractsTESTING THE NET BUYING PRESSURE HYPOTHESIS DURING THE ASIAN FINANCIAL CRISIS: EVIDENCE FROM HANG SENG INDEX OPTIONSTHE JOURNAL OF FINANCIAL RESEARCH, Issue 1 2006Kam C. Chan Abstract We investigate net buying pressure in the Hong Kong Hang Seng Index options market during the Asian financial crisis from July 1997 to August 1998. Our findings suggest that during this period, the dramatic changes in volatility overwhelmed the dynamics of supply and demand in the options market. The extremely high realized volatility drove market participants' expectations about future market volatility in the early months of the crisis. Findings during the late-crisis, pre-crisis, and post-crisis periods are consistent with the net buying pressure hypothesis. [source] Hedging under the influence of transaction costs: An empirical investigation on FTSE 100 index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 5 2007Andros Gregoriou The Black,Scholes (BS; F. Black & M. Scholes, 1973) option pricing model, and modern parametric option pricing models in general, assume that a single unique price for the underlying instrument exists, and that it is the mid- (the average of the ask and the bid) price. In this article the authors consider the Financial Times and London Stock Exchange (FTSE) 100 Index Options for the time period 1992,1997. They estimate the ask and bid prices for the index, and show that, when substituted for the mid-price in the BS formula, they provide superior option price predictors, for call and put options, respectively. This result is reinforced further when they .t a non-parametric neural network model to market prices of liquid options. The empirical .ndings in this article suggest that the ask and bid prices of the underlying asset provide a superior fit to the mid/closing price because they include market maker's, compensation for providing liquidity in the market for constituent stocks of the FTSE 100 index. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:471,494, 2007 [source] Optimal No-Arbitrage Bounds on S&P 500 Index Options and the Volatility SmileTHE JOURNAL OF FUTURES MARKETS, Issue 12 2001Patrick J. Dennis This article shows that the volatility smile is not necessarily inconsistent with the Black,Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a range of prices within which the option's price may fall and still be consistent with the Black,Scholes arbitrage pricing argument. This article uses a linear program (LP) cast in a binomial framework to determine the smallest possible range of prices for Standard & Poor's 500 Index options that are consistent with no arbitrage in the presence of transaction costs. The LP method employs dynamic trading in the underlying and risk-free assets as well as fixed positions in other options that trade on the same underlying security. One-way transaction-cost levels on the index, inclusive of the bid,ask spread, would have to be below six basis points for deviations from Black,Scholes pricing to present an arbitrage opportunity. Monte Carlo simulations are employed to assess the hedging error induced with a 12-period binomial model to approximate a continuous-time geometric Brownian motion. Once the risk caused by the hedging error is accounted for, transaction costs have to be well below three basis points for the arbitrage opportunity to be profitable two times out of five. This analysis indicates that market prices that deviate from those given by a constant-volatility option model, such as the Black,Scholes model, can be consistent with the absence of arbitrage in the presence of transaction costs. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1151,1179, 2001 [source] Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 5 2009Bing-Huei Lin Abstract We provide non-parametric empirical evidence regarding negative volatility risk premium using LIFFE equity index options. In addition, we incorporate the moment-adjusted option delta hedge ratio to mitigate the effect of model misspecification. From the results, we observe several interesting phenomena. First, the delta-hedged gains are negative. Second, with a correction for model misspecification, higher-order moments measures show less significance and the volatility risk premium still plays a key role in affecting delta-hedged gains. All empirical evidence supports the existence of negative volatility risk premium in LIFFE equity index options. [source] TESTING THE NET BUYING PRESSURE HYPOTHESIS DURING THE ASIAN FINANCIAL CRISIS: EVIDENCE FROM HANG SENG INDEX OPTIONSTHE JOURNAL OF FINANCIAL RESEARCH, Issue 1 2006Kam C. Chan Abstract We investigate net buying pressure in the Hong Kong Hang Seng Index options market during the Asian financial crisis from July 1997 to August 1998. Our findings suggest that during this period, the dramatic changes in volatility overwhelmed the dynamics of supply and demand in the options market. The extremely high realized volatility drove market participants' expectations about future market volatility in the early months of the crisis. Findings during the late-crisis, pre-crisis, and post-crisis periods are consistent with the net buying pressure hypothesis. [source] Cross-market efficiency in the Indian derivatives market: A test of put,call parityTHE JOURNAL OF FUTURES MARKETS, Issue 9 2008VipulArticle first published online: 30 JUL 200 This study examines the cross-market efficiency of the Indian options and futures market using model-free tests. The put,call,futures and put,call,index parity conditions are tested for European style Nifty Index options. Thirty-five-month time-stamped transactions data are used to identify mispricing. Frequent violations of both forms of put,call parity are observed. The restriction on short sales largely accounts for the put,call,index parity violations. There are numerous put,call,futures arbitrage profit opportunities even after accounting for transaction costs, which vanish quickly. Put options are overpriced more often than call options. The mispricing shows specific patterns with respect to time of the day, moneyness, volatility, and days to expiry. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:889,910, 2008 [source] Is it important to consider the jump component for pricing and hedging short-term options?THE JOURNAL OF FUTURES MARKETS, Issue 10 2005In Joon Kim The usefulness of the jump component for pricing and hedging short-term options is studied for the KOSPI (Korean Composite Stock Price Index) 200 Index options. It is found that jumps have only a marginal effect and stochastic volatility is of the most importance. There is evidence of jumps in the underlying index but no evidence of jumps in the corresponding index options. However, these results may not be valid for individual equity options. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:989,1009, 2005 [source] Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 12 2004Kam C. Chan We use the net buying pressure hypothesis of N. P. B. Bollen and R. Whaley (2004) to examine the implied volatilities, options premiums, and options trading profits at various time-intervals across five different moneyness categories of Hong Kong Hang Seng Index (HSI) options. The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out-of-the-money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis. First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1165,1194, 2004 [source] Directly measuring early exercise premiums using American and European S&P 500 Index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 3 2003Michael Dueker 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 [source] Optimal No-Arbitrage Bounds on S&P 500 Index Options and the Volatility SmileTHE JOURNAL OF FUTURES MARKETS, Issue 12 2001Patrick J. Dennis This article shows that the volatility smile is not necessarily inconsistent with the Black,Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a range of prices within which the option's price may fall and still be consistent with the Black,Scholes arbitrage pricing argument. This article uses a linear program (LP) cast in a binomial framework to determine the smallest possible range of prices for Standard & Poor's 500 Index options that are consistent with no arbitrage in the presence of transaction costs. The LP method employs dynamic trading in the underlying and risk-free assets as well as fixed positions in other options that trade on the same underlying security. One-way transaction-cost levels on the index, inclusive of the bid,ask spread, would have to be below six basis points for deviations from Black,Scholes pricing to present an arbitrage opportunity. Monte Carlo simulations are employed to assess the hedging error induced with a 12-period binomial model to approximate a continuous-time geometric Brownian motion. Once the risk caused by the hedging error is accounted for, transaction costs have to be well below three basis points for the arbitrage opportunity to be profitable two times out of five. This analysis indicates that market prices that deviate from those given by a constant-volatility option model, such as the Black,Scholes model, can be consistent with the absence of arbitrage in the presence of transaction costs. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1151,1179, 2001 [source] Option Pricing with Extreme Events: Using Câmara and Heston(2008),s Model,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 2 2009Sol Kim Abstract For the KOSPI 200 Index options, we examine the effect of extreme events for pricing options. We compare Black and Scholes (1973) model with Câmara and Heston (2008)'s options pricing model that allows for both big downward and upward jumps. It is found that Câmara and Heston (2008)'s extreme events option pricing model shows better performance than Black and Scholes (1973) model does for both in-sample and out-of-sample pricing. Also downward jumps are a more important factor for pricing stock index options than upward jumps. It is consistent with the empirical evidence that reports the sneers or negative skews in the stock index options market. [source] Using Markets to Inform Policy: The Case of the Iraq WarECONOMICA, Issue 302 2009JUSTIN WOLFERS Financial market-based analysis of the expected effects of policy changes has traditionally been exclusively retrospective. In this paper, we demonstrate by example how prediction markets make it possible to use markets to prospectively estimate policy effects. We exploit data from a market trading in contracts tied to the ouster of Saddam Hussein as leader of Iraq to learn about financial market participants' expectations of the consequences of the 2003 Iraq war. We conducted an ex-ante analysis, which we disseminated before the war, finding that a 10% increase in the probability of war was accompanied by a $1 increase in spot oil prices that futures markets suggested was expected to dissipate quickly. Equity price movements implied that the same shock led to a 1.5% decline in the S&P 500. Further, the existence of widely-traded equity index options allows us to back out the entire distribution of market expectations of the war's near-term effects, finding that these large effects reflected a negatively skewed distribution, with a substantial probability of an extremely adverse outcome. The flow of war-related news through our sample explains a large proportion of daily oil and equity price movements. Subsequent analysis suggests that these relationships continued to hold out of sample. Our analysis also allows us to characterize which industries and countries were most sensitive to war news and when the immediate consequences of the war were better than ex-ante expectations, these sectors recovered, confirming these cross-sectional implications. We highlight the features of this case study that make it particularly amenable to this style of policy analysis and discuss some of the issues in applying this method to other policy contexts. [source] The Effect of Short Sale Constraint Removal on Volatility in the Presence of Heterogeneous Beliefs,INTERNATIONAL REVIEW OF FINANCE, Issue 3-4 2003Alan Kraus ABSTRACT We evaluate the effect of short sale constraint removal on a stock market. The intuition is derived from simple geometry. We show that the price curve as a function of the uncertain future payoff changes when investors are able to act on the belief that the price of the share is relatively high. In a very simple model we show that volatility can either increase or decrease, depending on the variability of news about final payoffs. As an empirical illustration, we consider data from the Israeli stock market. The data show that volatility increased following the initiation of index options, consistent with the fact that short sales were prohibited in Israel when index options were introduced. [source] PRICING AND HEDGING AMERICAN OPTIONS ANALYTICALLY: A PERTURBATION METHODMATHEMATICAL FINANCE, Issue 1 2010Jin E. Zhang This paper studies the critical stock price of American options with continuous dividend yield. We solve the integral equation and derive a new analytical formula in a series form for the critical stock price. American options can be priced and hedged analytically with the help of our critical-stock-price formula. Numerical tests show that our formula gives very accurate prices. With the error well controlled, our formula is now ready for traders to use in pricing and hedging the S&P 100 index options and for the Chicago Board Options Exchange to use in computing the VXO volatility index. [source] AN EQUILIBRIUM GUIDE TO DESIGNING AFFINE PRICING MODELSMATHEMATICAL FINANCE, Issue 4 2008Bjørn Eraker The paper examines equilibrium models based on Epstein,Zin preferences in a framework in which exogenous state variables follow affine jump diffusion processes. A main insight is that the equilibrium asset prices can be computed using a standard machinery of affine asset pricing theory by imposing parametric restrictions on market prices of risk, determined inside the model by preference and model parameters. An appealing characteristic of the general equilibrium setup is that the state variables have an intuitive and testable interpretation as driving the consumption and dividend dynamics. We present a detailed example where large shocks (jumps) in consumption volatility translate into negative jumps in equilibrium prices of the assets as agents demand a higher premium to compensate for higher risks. This endogenous "leverage effect," which is purely an equilibrium outcome in the economy, leads to significant premiums for out-of-the-money put options. Our model is thus able to produce an equilibrium "volatility smirk," which realistically mimics that observed for index options. [source] Specification Analysis of Option Pricing Models Based on Time-Changed Lévy ProcessesTHE JOURNAL OF FINANCE, Issue 3 2004Jing-zhi Huang We analyze the specifications of option pricing models based on time-changed Lévy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the S&P 500 index options, we need to incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component. [source] The Effect of Options on Stock Prices: 1973 to 1995THE JOURNAL OF FINANCE, Issue 1 2000Sorin M. Sorescu I show that the effect of option introductions on underlying stock prices is best described by a two-regime switching means model whose optimal switch date occurs in 1981. In accordance with previous studies, I find positive abnormal returns for options listed during 1973 to 1980. By contrast, I find negative abnormal returns for options listed in 1981 and later. Possible causes for this switch include the introduction of index options in 1982, the implementation of regulatory changes in 1981, and the possibility that options expedite the dissemination of negative information. [source] The economic significance of conditional skewness in index option marketsTHE JOURNAL OF FUTURES MARKETS, Issue 4 2010Ranjini Jha This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness-based option-pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward-looking option implied volatilities, can significantly improve the performance of skewness-based trades but trading costs considerably weaken the profitability of index option strategies. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:378,406, 2010 [source] Box-spread arbitrage efficiency of Nifty index options: The Indian evidenceTHE JOURNAL OF FUTURES MARKETS, Issue 6 2009VipulArticle first published online: 1 APR 200 This study examines the market efficiency for the European style Nifty index options using the box-spread strategy. Time-stamped transactions data are used to identify the mispricing and arbitrage opportunities for options with this modelfree approach. Profit opportunities, after accounting for the transaction costs, are quite frequent, but do not persist even for two minutes. The mispricing is higher for the contracts with higher liquidity (immediacy) risk captured by the moneyness (the difference between the strike prices and the spot price) and the volatility of the underlying. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:544,562, 2009 [source] Expiration-day effects,An Asian twistTHE JOURNAL OF FUTURES MARKETS, Issue 5 2009Joseph K. W. Fung This study examines the intraday trading activities of index stocks on the common expiration day of index derivatives. In Hong Kong, index futures and index options use an Asian-style settlement procedure. All contracts are settled against the estimated average settlement price, an arithmetic average of the underlying cash index taken every five minutes on the expiration day. Trading volume and total trade count on the expiration day are both found to be higher than normal. Most important, trading intensifies in terms of volume and frequency close to the five-minute time marks. The study does not find significant price reversal and price compression patterns. Although significant order imbalance pattern is found on some expiration days, the results show no association between order imbalance pattern and the next-day return. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 28:430,450, 2009 [source] Tick sizes and relative rates of price discovery in stock, futures, and options markets: Evidence from the Taiwan stock exchangeTHE JOURNAL OF FUTURES MARKETS, Issue 1 2009Yu-Lun Chen This study examines the competition in price discovery among stock index, index futures, and index options in Taiwan. The price-discovery ability of the Taiwan Top 50 Tracker Fund, an exchange-traded fund based on the Taiwan 50 index is examined. The authors find that, after the minimum tick size in the stock market decreases, the bid,ask spreads of the component stocks of the stock index and the Taiwan Top 50 Tracker Fund get lower, and the contribution of the spot market to price discovery increases. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:74,93, 2009 [source] Informed trading in the index option market: The case of KOSPI 200 optionsTHE JOURNAL OF FUTURES MARKETS, Issue 12 2008Hee-Joon Ahn This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118,1146, 2008 [source] Price discovery in the options markets: An application of put-call parityTHE JOURNAL OF FUTURES MARKETS, Issue 4 2008Wen-Liang G. Hsieh This study investigates the relative rate of price discovery in Taiwan between index futures and index options, proposing a put-call parity (PCP) approach to recover the spot index embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Consistent with the trading-cost hypothesis, a dominant tendency is found for futures and a subordinate but non-trivial price discovery from options. The relative weight of options price discovery is sensitive to the methodology employed as the means of inferring the option-implicit spot price. The empirical evidence suggests that the information contained in the PCP-implied spot encompasses that provided by the Black-Scholes-implied spot. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:354, 375, 2008 [source] Smiling less at LIFFETHE JOURNAL OF FUTURES MARKETS, Issue 1 2008Bing-Huei Lin This study investigates the structure of the implied volatility smile, using the prices of equity options traded on the LIFFE. First, the slope of the implied volatility curve is significantly negative for both individual stocks and index options, and the slope is less negative for longer-term options. The implied volatility skew can be described by risk-neutral skewness and kurtosis, with the former having the first-order effect. Moreover, the implied volatility skew for individual stock options is less severe than for index options. Finally, the relationship between the real and risk-neutral moments implied in option prices is significant. The results indicate that, for equity options traded on the LIFFE, the slope of the implied volatility skew is flatter than that on the Chicago Board of Exchange (CBOE). © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:57,81, 2008 [source] Canonical valuation and hedging of index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 8 2007Philip Gray Canonical valuation is a nonparametric method for valuing derivatives proposed by M. Stutzer (1996). Although the properties of canonical estimates of option price and hedge ratio have been studied in simulation settings, applications of the methodology to traded derivative data are rare. This study explores the practical usefulness of canonical valuation using a large sample of index options. The basic unconstrained canonical estimator fails to outperform the traditional Black,Scholes model; however, a constrained canonical estimator that incorporates a small amount of conditioning information produces dramatic reductions in mean pricing errors. Similarly, the canonical approach generates hedge ratios that result in superior hedging effectiveness compared to Black,Scholes-based deltas. The results encourage further exploration and application of the canonical approach to pricing and hedging derivatives. © 2007 Wiley Periodicals, Inc. Jnl Fut Mark 27: 771,790, 2007 [source] The information content of option implied volatility surrounding the 1997 Hong Kong stock market crashTHE JOURNAL OF FUTURES MARKETS, Issue 6 2007Joseph K. W. Fung This study examines the information conveyed by options and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The author determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other leading indicator candidates. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, nonoverlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The study also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility. These results indicate that the options market is highly efficient informationally. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:555,574, 2007 [source] Hedging under the influence of transaction costs: An empirical investigation on FTSE 100 index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 5 2007Andros Gregoriou The Black,Scholes (BS; F. Black & M. Scholes, 1973) option pricing model, and modern parametric option pricing models in general, assume that a single unique price for the underlying instrument exists, and that it is the mid- (the average of the ask and the bid) price. In this article the authors consider the Financial Times and London Stock Exchange (FTSE) 100 Index Options for the time period 1992,1997. They estimate the ask and bid prices for the index, and show that, when substituted for the mid-price in the BS formula, they provide superior option price predictors, for call and put options, respectively. This result is reinforced further when they .t a non-parametric neural network model to market prices of liquid options. The empirical .ndings in this article suggest that the ask and bid prices of the underlying asset provide a superior fit to the mid/closing price because they include market maker's, compensation for providing liquidity in the market for constituent stocks of the FTSE 100 index. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:471,494, 2007 [source] Is it important to consider the jump component for pricing and hedging short-term options?THE JOURNAL OF FUTURES MARKETS, Issue 10 2005In Joon Kim The usefulness of the jump component for pricing and hedging short-term options is studied for the KOSPI (Korean Composite Stock Price Index) 200 Index options. It is found that jumps have only a marginal effect and stochastic volatility is of the most importance. There is evidence of jumps in the underlying index but no evidence of jumps in the corresponding index options. However, these results may not be valid for individual equity options. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:989,1009, 2005 [source] Implied correlation index: A new measure of diversificationTHE JOURNAL OF FUTURES MARKETS, Issue 2 2005Vasiliki D. Skintzi Most approaches in forecasting future correlation depend on the use of historical information as their basic information set. Recently, there have been some attempts to use the notion of "implied" correlation as a more accurate measure of future correlation. This study proposes an innovative methodology for backing-out implied correlation measures from index options. This new measure called implied correlation index reflects the market view of the future level of the diversification in the market portfolio represented by the index. The methodology is applied to the Dow Jones Industrial Average index, and the statistical properties and the dynamics of the proposed implied correlation measure are examined. The evidence of this study indicates that the implied correlation index fluctuates substantially over time and displays strong dynamic dependence. Moreover, there is a systematic tendency for the implied correlation index to increase when the market index returns decrease and/or the market volatility increases, indicating limited diversification when it is needed most. Finally, the forecast performance of the implied correlation index is assessed. Although the implied correlation index is a biased forecast of realized correlation, it has a high explanatory power, and it is orthogonal to the information set compared to a historical forecast. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:171,197, 2005 [source] Directly measuring early exercise premiums using American and European S&P 500 Index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 3 2003Michael Dueker 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 [source] | ||||||||||