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The impact of equity option expirations on the prices of non-expiring options

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  • Broughton, John B.
  • Chance, Don M.
  • Smith, David M.

Abstract

We present evidence that for non‐expiring options in the current expiration cycle, observed prices conform to the prices predicted by the dividend‐corrected Black‐Scholes model in the period prior to, and including, the expiration date. This is generally not true for options that are not in the current expiration cycle or for options during non‐expiration time periods. This evidence is interesting in that it suggests that the dividend‐corrected Black‐Scholes model is more useful as a pricing tool when there is a nearby expiration event affecting options on the same underlying stock. We also find that, during the expiration period, mean absolute pricing errors, a measure of pricing efficiency, are smaller for non‐expiring options in the current expiration cycle than for non‐current expiration cycle options.
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  • Broughton, John B. & Chance, Don M. & Smith, David M., 1995. "The impact of equity option expirations on the prices of non-expiring options," Review of Financial Economics, Elsevier, vol. 4(2), pages 109-123.
    • Handle: RePEc:eee:revfin:v:4:y:1995:i:2:p:109-123
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