I wrote my master's thesis on early exercises of american options (a while ago). My findings were that 98% of early exercises are due to no trading (extremely low trading volume). In the case a trader wants out of a position, it is rational for him/her to loose the speculative value of the option even if it not optimal, because he/she won't get hosed by the market makers.Hope this helps,Hiboumalin

Thanks Hiboumalin, that's very interesting - could you recommend any good publications (inc your own!) on the subject?

Karatzas/Shreve's "Mathematical Methods in Finance" has an entire chapter on the implications of American exercise. However, it's close to being impossible to read unless you1) are comfortable with real analysis2) are comfortable with functional analysis3) are comfortable with brownian motion/stochastic calculus (at the level of Karatzas/Shreve's "Brownian Motion and Stochastic Calculus")Oh wait, I'm insane.

Theoretically, no.In reality, occasionally you can arb OEX vs XEO (or even SPX) if you can trade within the spread.A good article on early exercise premiums is here.

There is indeed a paper on the early of exercise of options, specifically in the swaptions market. It is written by Francis Longstaff, Pedro Santa-Clara and Eduardo Schwarz from the Anderson School at UCLA. The paper is appropriately titled "Throwing away a billion dollars - The Cost of suboptimal exercise strategies in the swaptions market". Last time I checked, it was still available on the Anderson School Finance Working papers site.There are also some papers on irrational prepayment of mortgages, those not explained by the usual factors of seasoning, burnout etc.Regards,Anindya Samajdar

QuoteOriginally posted by: PaulThis is totally outrageous of me but here goes...you can hear/read about this 1. at the ICBI conference in Geneva (just contact me and I will get you a 20% discount <a target=new class=ftalternatingbarlinklarge href="mailto:Paul@wilmott.com">paul@wilmott.com</a&gt2. in the magazine, Issue 4PI am reading the programme for the ICBI conference in Geneva but I fail to see Paul's name anywhere. Am I reading an old version of the programme or .. ?Regards,Niclas

Fozzie,There's also an article on early exercises of american options by Diz and Finucane (1993 I believe). I'll check it out for you whenever I have some time.

Hey FozzieThis one is pretty cool. It's data intensive tough.The Rationality of Early Exercise Decisions: Evidence from the S&P 100 Index Options MarketFernando Diz, Thomas J. FinucaneThe Review of Financial Studies, Vol. 6, No. 4. (Winter, 1993), pp. 765-797.I wrote my thesis in French, so you must learn French first ;-)HTH

nsande, I hope you are looking at an old program! Take a look here.P

Thanks Hiboumalin, I'll check them out.Hmm, better start those French lessons again...Fozzie

Thanks Paul,I found it now. I guess I didn't look close enough on the operational risk stream. I don't quite see what your talk has to do with operational risk.Regards,Niclas