Boundary condition tests of bid and ask prices of index call options

Boundary conditions are established and tested for call options on the S&P 100 Index. The data consist of daily closing bid and ask quotes for the first four months of 1984. Four types of tests–the immediate exercise, European lower bound, vertical spread, and butterfly spread (convexity rule)–are performed on both an immediate and delayed execution basis. Violations are infrequent and those that occur tend to reverse by the end of the following day. Index options, therefore, are priced consistently with rational boundary conditions.