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Working Paper 2002-016A

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"Directly Measuring Early Exercise Premiums Using American and European S&P 500 Index Options"
by Michael J. Dueker, and Thomas W. Miller, Jr.

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.

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Category > Finance
Author > Michael J. Dueker