Put Option Exercise and Short Stock Interest Arbitrage
Journal of Investment Management (JOIM), First Quarter 2013
Posted: 20 May 2013
Date Written: May 17, 2013
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 explain 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 forgone 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: G00
Suggested Citation: Suggested Citation