Hello all,
I observed as we speak Nifty was closing close to 23900, so 23900 turns into ATM strike throughout the market shut. Often the worth distinction in ATM calls and places are very low, however as we speak, the decision was buying and selling 120+ factors above places at ATM (whereas its 5 extra days to expiry).
What would possibly trigger such enormous worth distinction for ATM choices? The Black 76 calculator reveals that the worth distinction is simply 40 factors, however in actuality its 3x increased. I’ve connected the choice chain under, you possibly can clearly see, sensibull marks the 24050 as ATM when nifty is buying and selling at simply 23900. Can somebody motive this? Thanks a bunch!
It’s brought about as a consequence of implied volatility (IV) being a lot increased for calls, reflecting the market’s curiosity/expectation for it to go up.Begin by inputting the IV proven in Sensibull or the VIX for volatility within the Black Scholes calculator and enhance/lower it till you arrive on the CMP of name/put. That will be the true IV.
No, it’s as a result of choices are priced based mostly on the futures worth (of expiry date), relatively than the present spot worth.
For weekly choices, there will not be a futures contract, however there may be some implied futures worth of December 5 expiry. I’m assuming that worth will probably be 100 pts above the spot worth on the time you checked.
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small_town_boy:
What would possibly trigger such enormous worth distinction for ATM choices?
You’re checking spot costs. Examine future costs and ATM strikes for each calls and places will probably be at identical premium.
If IV is the rationale, each name and put costs should go up collectively proper? Even in black scholes, enhance in IV, doesn’t enhance the distinction in name and put costs that a lot.
It doesn’t finish there, I discovered a imprecise rationalization of what may be occurring right here. However not totally certain, if that is how market behaviour works.
The snapshot was taken on the finish of November futures expiry day (twenty eighth Nov 2024), it reveals the choice chain for weekly expiry (Dec 5).
On expiry day (twenty eighth Nov), the Nov futures should converge with the spot, so it additionally has the identical worth because the spot. Which means Nov futures is ineffective for the evaluation. So,
Nov Futures Precise = Nov Futures Theoretical = Spot worth = 23914.5
However, the december month futures was buying and selling round 24137, which is way increased (100+ factors) than the theoretical december month futures worth of 24034. So,
Dec Futures Precise = 24137Dec Futures Theoretical = 23914.5*(1+0.06515*(28/365)) = 24034Future-Spot unfold = 24137 – 24034 = +103 factors. (Concludes that market notion is 103 factors increased than truthful worth which is kind of excessive, and might result in unfold arbitrage as defined right here)
Now coming again to choices, there isn’t any weekly futures expiry, so we have to depend on theoretical costs.
Dec fifth Futures Theoretical = 23914.5*(1+0.06515*(7/365)) = 23944
Now we all know from futures worth that the market is buying and selling at 103 factors above truthful worth, so does the ATM strike (the strike at which the present market thinks it has no intrinsic worth – defintion of ATM strike) lies 103 factors above the the dec fifth theoretical futures worth. So,
ATM strike as we speak = 23944 + 103 ~ 24050 (That is additionally the identical worth the precise weekly expiry futures would have traded if it existed)
However I’m not totally satisfied, any essential suggestions is enormously appreciated. Thanks!
Often as a consequence of market inefficiencies there needs to be two completely different IVs for the decision and put. See this Sensibull FAQ on why they solely show one:
Assist & FAQs
Why is the IV on the decision and put the identical in your possibility chain? Why do not…
In tutorial concept, in addition to in an environment friendly market, the decision and put IV needs to be the identical for a similar strike. Examples embody US / EU markets and OTC forex. However earlier than we go to the why, to be clear, allow us to repeat the what: Name and p…
I believe your confusion stems from utilizing the Black 76 calculator (sorry I missed it from the preliminary submit), which is used for pricing choices on futures. Regular inventory choices are priced based mostly on the Black Scholes Merton mannequin which makes use of the spot worth and takes threat free fee, dividend yield, volatility, and so forth. as separate parameters, because it’s not accounted for within the spot worth in contrast to the Black 76 mannequin which makes use of futures worth the place all of these parameters are already accounted for. For instance, see Zerodha’s BSM calculator:
zerodha.com
Zerodha – Black & Scholes calculator
Zerodha Black and Scholes possibility pricing method calculator
I’m nonetheless studying about all this, so CMIIW. 
Wow, that is one other shock for me! I take advantage of two calculators, one by zerodha and one by sharekhan. I assumed they had been the identical until now. Thanks for the information anyway. Right here is one fascinating remark, I merely added the future-spot unfold (103 factors) to identify worth (23914.5) and gave it as enter to black 76, was capable of match the 23900 name and put worth inside ±10 factors. Within the sharekhan calculator (which I consider its BSM, was capable of get ±20 factors worth distinction).
And relating to the IV submit, sure, there will be completely different IVs for Calls and Places typically and so they can get arbitraged away, however in our case the problem is with the opposite equation they point out referred to as put-call parity, the place it says spot ATM just isn’t the precise Precise ATM and we have to account futures worth.
