Empirical tests of boundary conditions for CBOE options

In this paper the lower boundary conditions for traded options are derived and subjected to empirical testing. Two hypotheses are formulated based on the theoretical conditions and tested on data on call options traded on the Chicago Board Options Exchange. The first hypothesis argues that the stock and options markets are well synchronized so that simultaneous closing prices are within the theoretical boundaries. The evidence in the ex post test is inconsistent with this hypothesis. The second hypothesis claims the markets to be efficient. The tests are directed toward the question whether arbitrage profits could actually have been made on the Exchange by exploiting the violations of the dominance condition. The tests, carried out as ex ante tests, indicate that positive profits could have been exploited on the average, but the magnitude of the average was small relative to the dispersion of the yields.