The Value of Wildcard Options.

Wildcard options are embedded in many derivative contracts. They arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position. This paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the S&P 100 index option contract. The results show that wildcard options can account for an economically significant fraction of S&P 100 index option value. Copyright 1994 by American Finance Association.