Question

With respect to maturity and strike prices, explain the possible case if the actual option prices do not behave in the way predicted by the theory.

Answer 1

The Price movements in theories are assumed with absolute applicability and there is no relation from other market developments or segments.

For example, In case of market crash like 2008, 2000 or 1929 or March 2020 which was attributed to the housing bubble or corona or tech bubble bust leading to an overall market collapse cannot be accounted by any theory model(and possibly cannot be accounted for in any mathematical model). But it did lead to low-probability extreme events of high declines in stock prices, causing massive losses for option traders. Thus the prices almost went to negligible level and all theories fail without upcoming maturity period.