The Value of the Wildcard Option in Cash-Settled American Index Options

Abstract

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