This paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the S&P 500 equity futures option market. The American futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in‐the‐money and to the option's time to expiration. The models are also shown to generate abnormal risk‐adjusted rates of return after transaction costs. The joint hypothesis that the American futures option pricing models are correctly specified and that the S&P 500 futures option market is efficient is refuted, at least for the sample period January 28, 1983 through December 30, 1983.

This study focuses on the ex-dividend stock price decline implicit within the valuation of American call options on dividend-paying stocks. The Roll (1977) American call option pricing formula and the observed structure of CBOE call option transaction prices are used to infer the expected ex-dividend stock price decline as a proportion of the amount of the dividend. The relative decline is shown to be not meaningfully different from one, confirming some recent evidence from studies which examined stock prices in the days surrounding ex-dividend.