What Type of Process Underlies Options? A Simple Robust Test

We develop a simple robust method to distinguish the presence of continuous and discontinuous components in the price of an asset underlying options. Our method examines the prices of at-the-money and out-of-the-money options as the option's time-to-maturity approaches zero. We show that these prices converge to zero at speeds that depend upon whether the underlying asset price process is purely continuous, purely discontinuous, or a combination of both. We apply the method to S&P 500 index options and find the existence of both a continuous component and a jump component in the index.