Do option investors rationally exercise their options? Numerous studies report evidence of irrational behavior. In this paper, we pay careful attention to intraday option quotes and reach the opposite conclusion. An exercise boundary violation (EBV) occurs when the best bid price for an American...

Theory says an American call should never be exercised early, except possibly just before an ex-dividend date. But the best market bid is frequently below intrinsic value for an in-the-money short maturity option. An American option can always be exercised to recover intrinsic value, while...

We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Together but not in isolation, options...

There is a close link between prices of equity options and the probability of default of a firm. We show that in the presence of positive expected equity recovery, the standard methods that assume zero equity recovery at default misestimate the probability of default implicit in option prices....

We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several...

We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several...

We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox–Ingersoll–Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out-of-sample estimates within 2% of the...

This paper examines the empirical literature on individual equity options, discussing results in areas of consensus, showing findings in areas of disagreement and providing a guide for future research (especially highlighting analyses that cannot be performed with index options). Key topics...

Our results suggest, selling SPY strangles are generally profitable across a variety of widths. However, the payoff profile of a short option strangle exposes the contract seller to a potential for unlimited losses. Our evidence on maximum draw-downs indicates that losses on some positions can...

I use five separate measures of deviation from Put-Call Parity of options on a stock without splits or dividends as separate negative measures for market efficiency. I rely upon the theory of trading volume as a function of short sales costs, etc., and that of market efficiency as a function of...