The Early Exercise Premium in American Put Option Prices

Posted: 12 Nov 2003

See all articles by Malin Engstrom

Malin Engstrom

Stockholm University - School of Business

Lars L. Norden

Stockholm University - Stockholm Business School

Abstract

This study estimates the value of the early exercise premium in American put option prices using Swedish equity options data. The value of the premium is found as the deviation of the American put price from European put-call parity, and in addition a theoretical estimate of the premium is computed. The empirically found premium is also used in a modified version of the control variate approach to value American puts. The results indicate a substantial value of the early exercise premium, where the premium derived from put-call parity is higher than the theoretical premium. The premium also increases with moneyness and time left to expiration, while the effect of interest rate and volatility depends on the moneyness of the option. The modified control variate technique works reasonably well relative the theoretical models. In particular, for deep in-the-money options, this technique is superior.

Keywords: Early exercise premium, American put options, Modified control variate technique

JEL Classification: G10, G13

Suggested Citation

Engstrom, Malin and Nordén, Lars L., The Early Exercise Premium in American Put Option Prices. Available at SSRN: https://ssrn.com/abstract=467904

Malin Engstrom

Stockholm University - School of Business ( email )

Department of Corporate Finance
S-106 91 Stockholm
Sweden

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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