strange options price movement

suvadipray · #1 14th January 2010, 02:46 PM

Can anyone please tell me why although nifty is up today about 27 pts at 2:45pm the 5300 call option is 1%down. I have never seen anything like this.. Please help.

Capricorn · #2 14th January 2010, 03:01 PM

Look to IV mainly for the answer..

AW10 · #3 14th January 2010, 03:07 PM

Quote:

Originally Posted by suvadipray

Can anyone please tell me why although nifty is up today about 27 pts at 2:45pm the 5300 call option is 1%down. I have never seen anything like this.. Please help.

That's exactly why it is important to know how option pricing works?

For 5300 call to be in profit, at current premium of 55 points, the nifty has to close above 5355 by expiry (i.e. in ext 9 trading days). And if players don't see the chance of that, then why would they pay 55 rs of premium.
Option price discouts what is the expectation till expiry.. it doesn't care about current or past. Professional players know it and they take advantage of retail traders ignorance.

Hope this helps.

DanPickUp · #4 14th January 2010, 04:03 PM

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natrium · #5 23rd January 2010, 09:54 AM

Option pricing is either based on Black Scholes or Bjerksund-Stensland Model. I am unable find out what NSE is using or I can not find the Greeks that is used for options trading. There is no need to get into this complex mathematic models , unless you are a Math purist.
However you can check it out at http://en.wikipedia.org/wiki/Black%E2%80%93Scholes and http://en.wikipedia.org/wiki/Binomia..._pricing_model

Regards,

Vasu

trader.trends · #6 23rd January 2010, 10:55 AM

Quote:

Originally Posted by natrium

Option pricing is either based on Black Scholes or Bjerksund-Stensland Model. I am unable find out what NSE is using or I can not find the Greeks that is used for options trading. There is no need to get into this complex mathematic models , unless you are a Math purist.
However you can check it out at http://en.wikipedia.org/wiki/Black%E2%80%93Scholes and http://en.wikipedia.org/wiki/Binomia..._pricing_model

Regards,

Vasu

Vasu

NSE does not decide the options pricing, it is decided by the market participants. Option pricing to a large extent depends on volatility. Some traders use sophisticated models to measure volatility and hence the pricing.

The seasoned trader measures volatility with the guts and trades the price he sees on the screen

bunny · #7 23rd January 2010, 11:03 AM

Hi TT,
Are you sure market participants decide option price. I think i have seen some formula on nse website by which option price is calculated. I am on browsing from mobile, so will reach home and post it.

trader.trends · #8 23rd January 2010, 11:51 AM

Quote:

Originally Posted by bunny

Hi TT,
Are you sure market participants decide option price. I think i have seen some formula on nse website by which option price is calculated. I am on browsing from mobile, so will reach home and post it.

Bunny
If I decide to sell you an option at 100 and you decide to buy it, and if you and I are the only traders in that option, that is the LTP. Exchanges only fix the strike prices. Options prices are market generated just like share prices are market determined.

Some institutions and individuals use the Black-Scholes (since discredited) or other models to see if the prices determined by the market are correct or not. If their model gives a price higher than the mkt price, then they think the options are priced cheaper and buy them with the hope that the price will rise. If the model throws up a cheaper price, they assume that the market has over priced the option and sell it hoping to buy back when the price comes down. The formulas are used to determine the value of options just like we use PE to determine value of a share.

The price and value need not be the same. The price and value not being the same is what creates buyers and sellers. Those who think the price is less than the value buy options/shares/futures and those who think the price is more than the value sell it. When the price and value become the same in the minds of all market participants, the markets will freeze. The exchanges do determine the prices of options not traded (theoretical value) for other purpose at EOD.

trader.trends · #9 23rd January 2010, 11:57 AM

Here is the extract from NSE:

Base Prices
Base price of the options contracts, on introduction of new contracts, would be the theoretical value of the options contract arrived at based on Black-Scholes model of calculation of options premiums.

The options price for a Call, computed as per the following Black Scholes formula:
C = S * N (d1) - X * e- rt * N (d2)

and the price for a Put is : P = X * e- rt * N (-d2) - S * N (-d1)

where :
d1 = [ln (S / X) + (r + σ2 / 2) * t] / σ * sqrt(t)
d2 = [ln (S / X) + (r - σ2 / 2) * t] / σ * sqrt(t)
= d1 - σ * sqrt(t)

C = price of a call option
P = price of a put option
S = price of the underlying asset
X = Strike price of the option
r = rate of interest
t = time to expiration
σ = volatility of the underlying

N represents a standard normal distribution with mean = 0 and standard deviation = 1
ln represents the natural logarithm of a number. Natural logarithms are based on the constant e (2.71828182845904).

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.

The base price of the contracts on subsequent trading days, will be the daily close price of the options contracts. The closing price shall be calculated as follows:

* If the contract is traded in the last half an hour, the closing price shall be the last half an hour weighted average price.

* If the contract is not traded in the last half an hour, but traded during any time of the day, then the closing price will be the last traded price (LTP) of the contract.

If the contract is not traded for the day, the base price of the contract for the next trading day shall be the theoretical price of the options contract arrived at based on Black-Scholes model of calculation of options premiums.

bunny · #10 23rd January 2010, 12:20 PM

Yeah, same formula. I thought you were saying that players decide option price.

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