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Tighter Option Bounds from Multiple Exercise Prices

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  • Peter Ryan

Abstract

Optionbounds are determined by state discount factors limited by prices of a riskless bond and the underlying asset. Usually the asset has at least two market-traded options for each maturity, further limiting the factors. Tighter bounds result from incorporating the prices of all existing options of the same maturity. The tightened bounds are particularly applicable to appraising the consistency of all options trading on a single underlying security, notably index options. Constructed examples indicate a potential improvement of eighty percent in bound width; index data reveals a lower reduction, but extensive arbitrage opportunities from violations of the tighter bounds. Copyright Kluwer Academic Publishers 2000

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  • Peter Ryan, 2000. "Tighter Option Bounds from Multiple Exercise Prices," Review of Derivatives Research, Springer, vol. 4(2), pages 155-188, May.
    • Handle: RePEc:kap:revdev:v:4:y:2000:i:2:p:155-188
    DOI: 10.1023/A:1009642309978
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    References listed on IDEAS

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    Cited by:

    1. John Handley, 2005. "On the Upper Bound of a Call Option," Review of Derivatives Research, Springer, vol. 8(2), pages 85-95, August.
    2. Ryan, Peter J., 2003. "Progressive option bounds from the sequence of concurrently expiring options," European Journal of Operational Research, Elsevier, vol. 151(1), pages 193-223, November.
    3. Guenter Franke & James Huang & Richard Stapleton, 2006. "Two-dimensional risk-neutral valuation relationships for the pricing of options," Review of Derivatives Research, Springer, vol. 9(3), pages 213-237, November.
    4. Constantinides, George M. & Jackwerth, Jens Carsten & Perrakis, Stylianos, 2005. "Option pricing: Real and risk-neutral distributions," CoFE Discussion Papers 05/06, University of Konstanz, Center of Finance and Econometrics (CoFE).
    5. Nicole Branger & Antje Mahayni, 2011. "Tractable hedging with additional hedge instruments," Review of Derivatives Research, Springer, vol. 14(1), pages 85-114, April.
    6. George M. Constantinides & Jens Carsten Jackwerth & Stylianos Perrakis, 2009. "Mispricing of S&P 500 Index Options," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1247-1277.
    7. Franke, Günter & Huang, James & Stapleton, Richard C., 2007. "Two-dimensional risk neutral valuation relationships for the pricing of options," CoFE Discussion Papers 07/08, University of Konstanz, Center of Finance and Econometrics (CoFE).

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