If option prices are
determined purely by supply and demand, one of the most
ubiquitous elements of financial markets would surely cease to
exist, says Pablo Triana
A relatively recent academic
paper highlights the central role of demand when it comes to
determining the actual prices of options in the real world.
While many may see such discovery as unusually
obvious and naive, the fact is that the paper´s
conclusions (just recently endorsed by two leading
) are thought-provoking, if
not all that surprising. They force us to ask ourselves a
question that might have previously seemed redundant but which,
once answered, has the potential to dramatically transform the
way we view the options market. That is, are prices of vanilla,
liquid options entirely and exclusively the result of supply
and demand forces?
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