For one-month S&P 500 index options, Constantinides, Jackwerth and Perrakis (2009) report widespread and substantial violations of stochastic dominance bounds. According to the subsequent study of Constantinides et al. (2011), the violations can be exploited to generate abnormal trading profits. The reported mispricing, which is far more extreme than known from the pricing kernel puzzle, calls into question that option markets meet the most basic requirements of rational pricing. We argue that this analysis is seriously flawed, and provide evidence that options on the S&P 500, EuroStoxx 50 and DAX index are priced almost perfectly in line with stochastic dominance bounds. Our results indicate that index option markets are much more efficient than previous literature suggests.

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