where [C.sup.E.sub.t](T; K) and [P.sup.E.sub.t](T; K) are the prices of European call and put options at time t with expiration time T and strike price K, r is the continuously compounded risk-free interest rate matching time to the option expiration
, and q is the continuously compounded dividend yield.
Our primary objective is to analyze the impact that option expiration has on non-expiring options.
We can identify several possible impacts of option expiration. First, there is the potential for increased demand for non-expiring options on the underlying stock for which some options are expiring as both hedgers and speculators roll over their positions.
Another potential impact is for heightened pricing efficiency for non-expiring options in the current expiration cycle throughout the period surrounding option expiration. Because short term options tend to have the largest open interest, we expect that these options reflect relatively greater amounts of information.
Dividend information is obtained from Moody's Dividend Record, and risk-free rates are obtained from the Wall Street Journal using treasury bills with maturity dates closest to the option expiration dates.
The statistic above is employed to test the joint hypothesis that the dividend corrected Black and Scholes model provides accurate estimates of call option prices and that call options are correctly priced around option expiration.(3) Mean values of [Mathematical Expression Omitted] that are significantly different from zero support rejection of the joint hypothesis.
This is consistent with the finding of Day and Lewis (1988) that option expiration dates are viewed by market participants as times of heightened volatility for the underlying stocks.
We examine the impact of option expiration on the prices of non-expiring common stock call option prices.
Prior to late 1984, option expirations on a particular underlying stock occurred only in the months of the cycle to which the stock was assigned.