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

34 Pages Posted: 28 Sep 2014 Last revised: 15 Sep 2015

See all articles by Dennis Lasser

Dennis Lasser

State University of New York (SUNY) at Binghamton - School of Management

Joshua D. Spizman

Loyola Marymount University - Department of Finance

Date Written: September 14, 2015

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

Suggested Citation

Lasser, Dennis and Spizman, Joshua D., The Value of the Wildcard Option in Cash-Settled American Index Options (September 14, 2015). Available at SSRN: https://ssrn.com/abstract=2502259 or http://dx.doi.org/10.2139/ssrn.2502259

Dennis Lasser

State University of New York (SUNY) at Binghamton - School of Management ( email )

Vestal Parkway East
Binghamton, NY 13902-6015
United States
607-777-4874 (Phone)

Joshua D. Spizman (Contact Author)

Loyola Marymount University - Department of Finance ( email )

Los Angeles, CA 90045
United States
(310) 338-2902 (Phone)

HOME PAGE: http://www.joshuaspizman.com

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