The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Early Exercise of Put Options on Stocks
Published: 07/19/2012 | DOI: 10.1111/j.1540-6261.2012.01752.x
KATHRYN BARRACLOUGH, ROBERT E. WHALEY
U.S. exchange‐traded stock options are exercisable before expiration. While put options should frequently be exercised early to earn interest, they are not. In this paper, we derive an early exercise decision rule and then examine actual exercise behavior during the period January 1996 through September 2008. We find that more than 3.96 million puts that should have been exercised early remain unexercised, representing over 3.7% of all outstanding puts. We also find that failure to exercise cost put option holders $1.9 billion in forgone interest income and that this interest is systematically captured by market makers and proprietary firms.