Observed Option Mispricing and the Nonsimultaneity of Stock and Option Quotations

Abstract

Empirical research on options usually relies on published stock and option quotations. A wellknown problem with these data is that the option price quotations are often from a different time of day than the stock price quotation. This nonsimultaneity of the option and stock quotations can cause inaccuracies in empirical work, especially in work to detect the mispricing of options. If the stock price is used to determine the correct option price (using a theoretical pricing model such as the Black-Scholes [1973] pricing formula), the option may appear to be mispriced because the stock price that was used in the formula, the stock price quoted as the closing price, is not the stock price that existed in the market when the last option price was quoted. The problem of nonsimultaneity will also lead to apparent profitable trading strategies when in fact no such strategy exists. When the researcher takes an option position based on the published quotation, an apparent profit may be illusory, since trade may not have been possible at that price at the same time that the stock price equaled its published quote. The problems with nonsimultaneity have been discussed in a number of empirical papers. Studies of option market efficiency by Trippi, by