During the class certification stage of a securities class action, evidence of market efficiency is typically presented for the securities at issue. For common stock, tests based on the Cammer factors, Krogman factors, and academic literature are frequently performed. For options, courts have often assumed market efficiency whenever efficiency is shown for the underlying common stock, sometimes without considering additional analyses. However, in an order earlier this year, the court in In re Apple Inc. Securities Litigation suggests that more detailed analyses may need to be performed in the future to demonstrate market efficiency for options.
In a recent Law360 publication “Testing Option Market Efficiency In Securities Class Actions,” Senior Consultant Edward Flores discusses assessing market efficiency for options by examining whether option prices satisfy put-call parity, which defines a relationship between the price of call options, the price of put options, and the price of the underlying stock. As an example of how one can perform a put-call parity analysis in practice, the author analyzes options for Apple common stock over the period from 2 November 2018 through 2 January 2019, the class period alleged in In re Apple Inc. Securities Litigation. In this analysis, both the aggregate options market and individual option pairs are analyzed to obtain a more complete picture of the degree of market efficiency for Apple options.