The predicted price of an American option by the Black-Scholes (B-S) Option Pricing Model is known to differ from the market price of that option systematically with respect to time to expiration, distance in- or out-of-the-money, and liquidity of the option. We examine the possibility of price barriers in the stock market causing further systemic pricing differences between the market price and B-S predicted price. These differences occur when an option’s strike price is near a price barrier and differ in effect and significance depending on the position of the barrier relative to the underlying stocks’ price. We find round number price barriers in the stock market are beginning to be internalized into the option market. Additionally, Bollinger bands and Gann levels appear to receive special attention from investors, but do not act as price barriers.
Blyler, Nathan A.
"Price Barriers in the Stock Market and Their Effect on the Black-Scholes Option Pricing Model,"
Gettysburg Economic Review: Vol. 7
, Article 3.
Available at: http://cupola.gettysburg.edu/ger/vol7/iss1/3