The measurement of option mispricing

Different studies have examined the ability of the Black-Scholes option pricing model to estimate accurately market prices of publicly traded options and reached conflicting results. This study examines commonly used ex ante measures of option mispricing, finds that they can produce differing conclusions about option prices, and develops an alternative measure for gauging option mispricing. Empirical analysis of returns to options selected using the various mispricing measures indicates that this new measure is more likely to detect mispricing and identify options that yield excess returns before commissions.