An examination of the efficiency of the London Traded Options Market

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Abstract
This paper examines the pricing of call options on the London Traded Options Market using month-end data on 16 companies from April 1978 to July 1983.The Black and Scholes model is Successful in identifying mispriced options and therefore appears to be applicable. However, the significant profits which can be made from using the model (in establishing riskless spreads)do not exceed transactions costs.The market cannot therefore be said to be inefficient in the narrowly financial sense. It remains to investigate whether the very large bid-ask spreads on this market (Which are the major component of transactions costs) are actually justified by the risks borne by market makers.

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