Market efficiency is the characteristic of a market in which the prices of the instruments trading therein reflect their true economic values to investors. In an efficient market, prices fluctuate randomly and investors cannot consistently earn returns above those that would compensate them for the level of risk they assume.
The idea that the asset has a “true economic value” is a particularly appealing concept. It suggests that if we could determine the real value, we could make a lot of money buying the same when it is prices below its real value. And sell the same when it is priced above its real value. But finding the true economic value requires a model of how the asset is priced. There have been models developed for the same but no one can say with surety if it could work all the time; as it is demand and supply which determines the prices of securities in the market.
An efficient market is the one in which the price of an asset equals its true economic value, which is called theoretical fair value. Spot and derivative markets are normally quite efficient.
Although this book presents numerous strategies for using derivatives, all of them assume that the investors have already developed expectations about the direction of the market. Derivative strategies show how to profit if those expectations prove correct and how to minimize the risk of loss should those expectations prove otherwise.