Put Option Exercise and Short Stock Interest Arbitrage

Journal of Investment Management (JOIM), First Quarter 2013

Posted: 20 May 2013

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2013

Abstract

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 explain 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.

Keywords: Put options on stocks, early exercise, failure to exercise

JEL Classification: G00

Suggested Citation

Barraclough, Kathryn and Whaley, Robert E., Put Option Exercise and Short Stock Interest Arbitrage (May 17, 2013). Journal of Investment Management (JOIM), First Quarter 2013, Available at SSRN: https://ssrn.com/abstract=2266663

Robert E. Whaley

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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