I am not familiar enough with the theories of option pricing to understand how negative option prices are possible. I found two research papers indicating that negative option prices are indeed possible for callable US treasury bonds:
- Are Negative Option Prices Possible? The Callable U.S. Treasury-Bond Puzzle
- Negative option values are possible: The impact of Treasury bond futures on the cash U.S. Treasury market
Can someone explain why negative option prices are possible for callable US treasury bonds?