What question did this study set out to answer?

To identify and quantify hidden risks and optionalities in American options using a new stochastic approach.

April 16, 2026Open Access

Hidden Optionalities in American Options

Key Points

To identify and quantify hidden risks and optionalities in American options using a new stochastic approach.
Introduced a practical framework incorporating stochasticity into underlying determinants of American options.
Analyzed how conventional pricing systems treat inputs deterministically.
Developed a heuristic approach to evaluate early-exercise features more effectively.
Demonstrated that conventional pricing systems underestimate flexibility in American options.
Highlighted the importance of convexity in evaluating early-exercise features.
Provided insights into hidden risks in American options that were previously overlooked.

Abstract

We develop a practical framework for identifying and quantifying the hidden layers of risks and optionality embedded in American options by introducing stochasticity into one or more of their underlying determinants. The heuristic approach remedies the problems of conventional pricing systems, which treat some key inputs deterministically, hence systematically underestimate the flexibility and convexity inherent in early-exercise features.

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Discussion

Authors

Noura El Hassan

Bacel Maddah

Nassim Nicholas Taleb

Journals

Risks

Actions

Institutions

American University of Beirut

Bay Institute

Mediterranean Institute of Management

References and Citations

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Hidden Optionalities in American Options

Key Points

Abstract

Citation Network

Connected Papers

Discussion

Authors

Journals

Actions

Institutions

References and Citations

Citation Network

Connected Papers

Discussion

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