Early Exercise of Put Options on Stocks




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    • Barraclough and Whaley are from the Owen Graduate School of Management at Vanderbilt University. The authors are grateful to Cliff Ball, Darrell Duffie, F. Douglas Foster, Phil Gocke, Paul Jiganti, Eric Noll, Jacob Sagi, Tom Smith, Walt Smith, and Hans Stoll as well as to an anonymous referee for insightful comments/discussions and to the Options Clearing Corporation for providing the early exercise data. We are also grateful to Christoph Schenzler for providing excellent research assistance.


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 derive 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.