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April 16, 2026Risks0 citationsOpen Access

Hidden Optionalities in American Options

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NHNoura El HassanBMBacel MaddahNTNassim Nicholas Taleb

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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Cite This Study

Hassan et al. (2026) studied this question.

synapsesocial.com/papers/69e07de52f7e8953b7cbed77https://doi.org/10.3390/risks14040089
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