Why would anyone assume equity price dictates options price? If there's arbitrage between the two instruments, they'll both exert a force on one another and the larger market (options) will exert the larger force.
options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it
its not really about arbitrage between markets, it’s the varying motives within the options market and varying prices others are willing to pay. Although this can be influenced by arbitrage between markets for some people.
the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be
> options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it
Options arbitrage between equity and options via BSM variants is settled science. As is put-call parity, an arbitrage between put and call pricing. The latter is a perfect arbitrage—it is riskless. The former is not, there is risidual risk that must be continuously managed. (That management is another transmission mechanism for information between the markets.) When mismanaged, it blows you up. But it still enforced a tight, arbitrabgeable relationship between equity prices and options.
What does blow people up is thinking options models are B.S. and then going and trading options. They’re likely the reason my options-trading hedge fund stakes have been doing so well.
If I think stocks are mispriced, I will probably buy an option to maximise the profit from my edge. That will drive the equity market. How arbitrage is derived is irrelevant.
its not really about arbitrage between markets, it’s the varying motives within the options market and varying prices others are willing to pay. Although this can be influenced by arbitrage between markets for some people.
the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be