Some of the quotes below are clearly mispriced. In fact, there are at least 6 qu
ID: 2627333 • Letter: S
Question
Some of the quotes below are clearly mispriced. In fact, there are at least 6 quotes that violate various price behaviors of options. Identify the mispriced options by their nature (call or put), their strike price, and the expiration month and then state which relationship/pricing rule is being violated.
Calls
Puts
Option and NY Close
Exercise/
Strike
Price
Expiration
Vol.
Last
Vol.
Last
GM
5
November
89
1.12
41
.15
6.80
5
December
85
1.15
22
.10
6.80
8
November
5
1.15
41
1.10
6.80
8
February
60
.45
55
1.20
Calls
Puts
Option and NY Close
Exercise/
Strike
Price
Expiration
Vol.
Last
Vol.
Last
GM
5
November
89
1.12
41
.15
6.80
5
December
85
1.15
22
.10
6.80
8
November
5
1.15
41
1.10
6.80
8
February
60
.45
55
1.20
Explanation / Answer
The efficient markets hypothesis (EMH) is an investment theory that asserts that financial markets are "informationally efficient." That is, markets always reflect all available information about an asset's value. According to EMH, an investor should not be able to use market timing techniques or expert stock selection to outperform the market. There are three variations of the hypothesis. The strong version asserts that all information, including insider information, is instantly reflected in an asset's price. Semi-strong theory includes only current information available to the public. The weak version asserts only past information available to the public is reflected. While EMH is a fundamental theory, it is subject to ongoing debate about its validity, especially in times of major disruption in the financial markets.
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