An Early-Exercise-Probability Perspective of American Put Options in the Low-Interest-Rate Era

One consequence of near zero global interest rates is that American put options are unlikely to be exercised early, making them almost indistinguishable from their European counterparts. This study examines the dependence of the early exercise probability (EEP) on the dividend yield to interest rate ratio and other parameters. A numerical procedure for accurate calculation of the EEP along with an easy-to-check condition for almost-never-early-exercise (ANEE) are developed. An examination of 100 CBOE actively traded American put options on dividend-paying stocks from September 1, 2011 through August 31, 2013 shows that most of them satisfy the ANEE condition under today's low interest rates. (c) 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:1154-1172, 2015