The Ex-Dividend Day Behavior of Option Prices
Article Abstract:
It is generally accepted that the price of a share of common stock will decline near the ex-dividend day. Because call options on underlying shares are not sheltered from divided payment, the issue of price behavior on call options, becomes important. Investors' poor exercise policies can result in abnormal returns. Findings indicate that there may well be reason to be suspicious of market efficiency in United States call options on ex- dividend days. Ex-dividend day behavior is analyzed to see if a discontinuity in stock prices will cause profit opportunities to exist. Special attentions devoted to the links between call option prices and underlying stock prices, both assets at various time points, and the situations in which both assets will earn only their respective equilibrium rates of return. Data was gathered from Rapidata, a commercial service. A subsample of three hundred and sixteen options was used. Tables of comparative data are included.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1984
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Are negative option prices possible? The callable U.S. treasury-bond puzzle
Article Abstract:
Callable US Treasury bonds often suggest negative call option values. Analysis of the prices of a recent sample of these bonds show that almost 66% of the call values were negative. This goes against the widely-held concept in option-pricing theory that option prices are always positive. A study was conducted to examine the possible reasons for the aberrant behavior of option prices when it comes to callable Treasury bonds. Among these factors were the Treasury Dept's call policy, bond liquidity, differential tax treatment for callable bonds, bond premium amortization and tax-timing options. Results of the study showed no evidence that these and the other factors examined are responsible for the negative values. An explanation for the negative option prices has yet to be found.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1992
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Call-option pricing and the turn of the year
Article Abstract:
An analysis of historical equity call option prices reveals that the abnormally high returns at the end of the year and in January are possibly the result of the anticipation of these trends by investors. This anticipation is incorporated into call option prices whose expiration and trade date fall in this period. Research results indicate support for the validity of the efficient markets hypothesis, which holds that trends would be known and anticipated by investors and financial markets before the fact.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1989
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