The Value of the Wildcard Option in Cash-Settled American Index Options
34 Pages Posted: 28 Sep 2014 Last revised: 15 Sep 2015
Date Written: September 14, 2015
We estimate the size of the wildcard premium embedded in cash-settled American-style options. Similar to simulation results reported by Fleming and Whaley (1994), we find the wildcard premium significantly impacts the valuations of American-style put and call options. Furthermore, we find that the wildcard premium as a percentage of price is somewhat larger than the Fleming-Whaley simulation in periods of low implied volatility but not in periods of high volatility. Finally, we show a correlation between the size of the wildcard premium and overnight S&P 100 overnight returns.
Keywords: Cash Settled Options; S&P 100 Index; Option Pricing; American-style; European-style
JEL Classification: G10, G12, G13
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