Hedging of American Equity Options: Do Call and Put Prices Always Move in the Direction as Predicted by the Movement in the Underlying Stock Price?

Posted: 12 Nov 2003

See all articles by Lars L. Norden

Lars L. Norden

Stockholm University - Stockholm Business School

Abstract

Using daily Swedish equity options data, an empirical analysis of some basic textbook properties for American options is performed. Several violations of these properties are found; call and put prices often move in the "wrong" direction compared to the stock price, call and put prices sometimes also increase or decrease simultaneously and option price changes are often larger than corresponding stock price changes. The hedging performance of the American options is evaluated by constructing delta-neutral and delta-vega-neutral portfolios. The empirical performance of these strategies is sometimes bad. Indeed, violation occurrences make hedging a rather risky business.

Keywords: Hedging, American equity options, Violations of basic properties

JEL Classification: G10, G13

Suggested Citation

Nordén, Lars L., Hedging of American Equity Options: Do Call and Put Prices Always Move in the Direction as Predicted by the Movement in the Underlying Stock Price?. Journal of Multinational Financial Management, Vol. 11, p. 321-340, 2001. Available at SSRN: https://ssrn.com/abstract=467903

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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