Early Exercise of Put Options on Stocks

58 Pages Posted: 17 Aug 2011 Last revised: 17 Nov 2012

Date Written: August 17, 2011


U.S. exchange-traded stock options are exercisable before expiration. While put options should frequently be exercised early to earn interest, they are not. In this paper, we derive an early exercise decision rule and then examine actual exercise behavior during the period January 1996 through September 2008. We find that more than 3.96 million puts that should have been exercised early remain unexercised, representing over 3.7% of all outstanding puts. We also find that failure to exercise cost put option holders $1.9 billion in foregone interest income and that this interest is systematically captured by market makers and proprietary firms.

Keywords: put options on stocks, early exercise, failure to exercise

JEL Classification: G10, G12, G13

Suggested Citation

Barraclough, Kathryn and Whaley, Robert, Early Exercise of Put Options on Stocks (August 17, 2011). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1911208

Kathryn Barraclough


Robert Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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