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Price‐to‐Earnings Ratios and Option Prices

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  • Ansley Chua
  • R. Jared DeLisle
  • Sze‐Shiang Feng
  • Bong Soo Lee

Abstract

In May of 1997, in the midst of the Internet bubble, the average month end P/E ratio for the software industry was 44. However, the 5‐year historical average was 31. In this study, we examine the effect of this industry value fluctuation on the effects of option prices. We examine the relationship between the level of relative valuation and option pricing via deviations in put‐call parity and a two‐factor option pricing model incorporating relative valuation. We find support that the increase in relative industry valuation Granger causes put‐call parity deviations, implying investors price options with greater expectation of downward movement. Additionally, we develop a model and find support that the two‐factor option pricing model that incorporates relative industry valuation prices options better than the standard Black–Scholes (1973) model. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 35:738–752, 2015

Suggested Citation

  • Ansley Chua & R. Jared DeLisle & Sze‐Shiang Feng & Bong Soo Lee, 2015. "Price‐to‐Earnings Ratios and Option Prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(8), pages 738-752, August.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:8:p:738-752
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    Cited by:

    1. Zhang, Huiming & Watada, Junzo, 2019. "An analysis of the arbitrage efficiency of the Chinese SSE 50ETF options market," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 474-489.

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