Progressive option bounds from the sequence of concurrently expiring options

Option bounds determined by the observed prices of the underlying security and a riskless bond are improved by the sequential addition of other observed prices. Each market-traded asset which can be functionally linked to the initial option imposes constraints on the set of state discount factors (SDFs) underlying financial asset prices. In the absence of arbitrage opportunities, all assets are consistently priced by the SDFs, whose values are limited by additional concurrently expiring options on the same security. Only the two options with exercise prices closest to the initial option provide binding information. Constructed examples demonstrate significant improvement in bounds. The unique structure of the formulation as a linear program is extendible to applications other than financial asset pricing in cases of similar constraint definition.