TRADING CASE RE3
Options, information, and market efficiency
LEARNING OBJECTIVE
Understand how stock and option markets can reveal information and support option-trading strategies.
KEY CONCEPTS
Market efficiency | Rational expectations | Calls and puts | Option strategies
HOW THE CASE WORKS
Two non-dividend-paying stocks trade for two periods. Two European options on Firm 1 also trade: a call with strike 30 and a put with strike 30. All prices are set by traders.
CASE DATA
| Period 1 event | Period 2 x | Period 2 y | Period 2 z | Call K=30 | Put K=30 |
|---|---|---|---|---|---|
| x | 0 | 20 | 40 | 0 / 0 / 10 | 30 / 10 / 0 |
| y | 0 | 25 | 45 | 0 / 0 / 15 | 30 / 5 / 0 |
| z | 0 | 35 | 60 | 0 / 5 / 30 | 30 / 0 / 0 |
MARKET SETTING
Each firm's terminal stock value depends on its Period 1 and Period 2 contract events. All traders receive truthful private messages that rule out one event for each firm and period.
TRADING RULES
- Click Stock 1 or Stock 2 to view private information.
- Messages such as 'Per 1: Not x' are never false.
- The call pays max(Firm 1 value - 30, 0); the put pays max(30 - Firm 1 value, 0).
- At the end of Period 2, stock and option payoffs are converted to cash.
AFTER TRADING CLOSES
The realized event or economic path determines the security payoffs. Cash, long positions, and short positions are settled according to the case rules.
PERFORMANCE: Grade cash per trial = 0.0001 x closing market cash. Results accumulate across independent trials.