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The Value of Wildcard Options

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  • Fleming, Jeff
  • Whaley, Robert E

Abstract

Wildcard options are embedded in many derivative contracts. They arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position. This paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the S&P 100 index option contract. The results show that wildcard options can account for an economically significant fraction of S&P 100 index option value. Copyright 1994 by American Finance Association.

Suggested Citation

  • Fleming, Jeff & Whaley, Robert E, 1994. "The Value of Wildcard Options," Journal of Finance, American Finance Association, vol. 49(1), pages 215-236, March.
    • Handle: RePEc:bla:jfinan:v:49:y:1994:i:1:p:215-36
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    Cited by:

    1. Weihan Li & Jin E. Zhang & Xinfeng Ruan & Pakorn Aschakulporn, 2024. "An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1117-1153, July.
    2. Lapshin, Victor & Sohatskaya, Sofia, 2020. "Choosing the weighting coefficients for estimating the term structure from sovereign bonds," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 635-648.
    3. Koopman, Siem Jan & Jungbacker, Borus & Hol, Eugenie, 2005. "Forecasting daily variability of the S&P 100 stock index using historical, realised and implied volatility measurements," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 445-475, June.
    4. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1996. "Implied Volatility Functions: Empirical Tests," Working Papers hal-00606071, HAL.
    5. Broadie, Mark & Detemple, Jerome & Ghysels, Eric & Torres, Olivier, 2000. "American options with stochastic dividends and volatility: A nonparametric investigation," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 53-92.
    6. Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    7. Lasser, Dennis J. & Spizman, Joshua D., 2016. "The value of the wildcard option in cash-settled American index options," Journal of Financial Markets, Elsevier, vol. 28(C), pages 116-131.
    8. Barraclough, Kathryn & Stoll, Hans R. & Whaley, Robert E., 2012. "Stock option contract adjustments: The case of special dividends," Journal of Financial Markets, Elsevier, vol. 15(2), pages 233-257.
    9. Adrian Fernandez‐Perez & Bart Frijns & Ilnara Gafiatullina & Alireza Tourani‐Rad, 2019. "Properties and the predictive power of implied volatility in the New Zealand dairy market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(5), pages 612-631, May.
    10. Carcano, Nicola & Dall'O, Hakim, 2011. "Alternative models for hedging yield curve risk: An empirical comparison," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2991-3000, November.
    11. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    12. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    13. Stanton, Richard, 2000. "From cradle to grave: How to loot a 401(k) plan," Journal of Financial Economics, Elsevier, vol. 56(3), pages 485-516, June.

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