Early CBOE options traded at prices wildly above Black-Scholes values

Evidence

The first day that the Exchange opened … I looked at the prices of calls and I looked at the model and the calls were maybe 30–40% overvalued! And I called Myron [Scholes] in a panic and said, “Your model is a joke,” and he said, “Give me the prices,” and he went back and he huddled with Merton and he came back. He says, “The model’s right.” And I ran down the hall … and I said, “Give me more money and we’re going to have a killing ground here.” — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 102

Categorization

• CANDY: The image of Galai panicking at 30-40% overpricing, Scholes calmly insisting the model is right, then ‘a killing ground’ is a vivid, quotable anecdote.
• XREF: connects to: Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding; Option market prices initially diverged from the Black-Scholes model but converged — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 735; Black-Scholes-Merton pricing fit observed options data only approximately at launch. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 625 (+1 more)

Related

• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.91)
• Black-Scholes-Merton pricing fit observed options data only approximately at launch. (similarity 0.88)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.84)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.83)
• Black-Scholes fit option prices well for eleven years, then stopped after 1987 (similarity 0.82)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.80)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.80)
• Option price must equal the cost of a continuously adjusted replicating portfolio. (similarity 0.79)
• Viewing market prices as the flaw, not the model, drove prices down (similarity 0.79)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.79)
• The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. (similarity 0.79)
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.78)

Broader Connections

• Option market prices initially diverged from the Black-Scholes model but converged #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 735