Options cheaper than the fair value?

[anupshinde]

Date - 28-Mar-2016. Time 3.50pm
Nifty 7700 PE (Expiry31Mar2016)
LTP: 65.9
Bid: 64.05, Ask: 65.60
Nifty is at 7615.1

If you see the put option 7700PE is in the money. i.e. 7700-7615.1 = 84.9

Based on the LTP, the option is priced cheaper (84.9-65.9) = Rs. 19 cheaper than fair value.

Assuming Nifty stays at the current strike price on expiry:
Lets say I bought the put option at 66 and waited to exercise it. In that case, the STT would be ((7700+65)*75*0.125%) == Rs. 728 approximately.

Sell Value (19*75) = 1,425
STT = 728
Brokerage+Taxes (on a discount broker platform) = 60 (rounded)
Profit per lot = 1425-728-60 = 637


Isn't that a risk free 637 profit per lot?

What am I calculating wrong or missing here?

Also, I had been observing this for 3-4 hours in the market where the option felt cheaper than the fair value. I thought that might be a precursor to a bullish move, however the market tanked in those hours. And this doesn't make sense to me yet.

P.S: I am not an experienced options trader

 

[raj_singh]

most option trader trade options based on future value and not on spot value. what you had mention is spot value(7615.1). today NF future closed at 7659.6. so if we calculate options value based on future 7700(PE)-7659.6(F) = 40.4 (fair value)

NF7700PE LTP is 65.9
65.9-40.4=25.5
so according to future value, nifty 7700PE is at 25.5 points premium

and of-course f&o settled at its spot value.

 

[poniol]

Raj Singh is correct saying that options are traded considering Futures value. See DLF on 23rd for 110 CE.
On 31st you will see Futures and Spot will be same( or difference will be negligible).

 

[lemondew]

Thats 1.25% STT on option which are closed ITM . Hence 1.25% of 75*7700 approx 700 Rs
Closing price of nifty = average of last 30 minutes of trade. This is taken care of by the price

Date - 28-Mar-2016. Time 3.50pm
Nifty 7700 PE (Expiry31Mar2016)
LTP: 65.9
Bid: 64.05, Ask: 65.60
Nifty is at 7615.1

If you see the put option 7700PE is in the money. i.e. 7700-7615.1 = 84.9

Based on the LTP, the option is priced cheaper (84.9-65.9) = Rs. 19 cheaper than fair value.

Assuming Nifty stays at the current strike price on expiry:
Lets say I bought the put option at 66 and waited to exercise it. In that case, the STT would be ((7700+65)*75*0.125%) == Rs. 728 approximately.

Sell Value (19*75) = 1,425
STT = 728
Brokerage+Taxes (on a discount broker platform) = 60 (rounded)
Profit per lot = 1425-728-60 = 637


Isn't that a risk free 637 profit per lot?

What am I calculating wrong or missing here?

Also, I had been observing this for 3-4 hours in the market where the option felt cheaper than the fair value. I thought that might be a precursor to a bullish move, however the market tanked in those hours. And this doesn't make sense to me yet.

P.S: I am not an experienced options trader

 

[anupshinde]

Thanks raj_singh an poniol. That makes sense.

 

[sudhakarsingh]

Hi,
I am taking it further. Prices are calculated on underlying basis. On expiry future and underlying will be same. But I found it confusing again. Today 26 June 2019 IGL is trading 312.55 future 313.75. Price of 320PE is

LTP 5.25
Intrinsic value wrt Spot 7.45
Intrinsic value wrt future 6.25

Why diff again?

STT is levied after trade so I don't think people will give rebate.