Deep OTM Option Premiums going haywire?

Considering markets are intelligent, how do you explain these deep otm call premiums. For instance, Nifty 20k strike CE expiring tomorrow closed at Rs 1.75. On the other hand, Nifty 17k PE expiring tomorrow closed at Rs 1.4!

And more interestingly, in the option chain snapshot below, 19150 CE has a bid of Rs 1.35, and 20000 CE of Rs 1.4!!

These are bought to reduce margin, as sellers are less than buyer so prices increased . They will go 0 tomorrow.

Check tom morning open prices :slight_smile:

But then how do you explain a bid of 1.4rs at 20k when the ask at 19.5k is 1.35rs? Too lazy to check across strikes?

This isn’t just about closing prices. It actually was trading like this in the last hour.

Monthly expiry ,people buy sell months before so there is Vol skew. Read about volatility skew in options. Don’t screw your head over 5 paisa. Nothing new is happening here ,its just no body wanna sell new contract as transaction and interest rate costs more and no one interested to sell at lower price however free money on the table.

Crude future traded -ve for same reason, no one had capacity to take delivery,

It’s because of option Greek vega. So when sudden volatility happens vega becomes extremely high for OTM options.

You can read it here. It’s explained well with the scenario you mentioned

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Options are usually priced efficiently (in liquid underlying) only for strikes under 3 Sigma.

Anything higher, the options can’t be priced efficiently. How do you price for events that happen only .3% of the times or lower. You can’t!

This only gets exaggerated as you go further out to 4,5,6 Sigma.

On Similar Topic.

Oh yes, big institutions are deploying crores of rupees to manipulate some arbitrary metric to take few rupees away from the guy trading one lot of nifty/bankNifty :joy::joy:

From my understanding of vega, it at best explains the rise in deep otm call premiums even when the spot is moving favourably. Maybe I was not articulate enough in my questioning but I still don’t understand why the volatility is not skewing put premiums in a falling market. With spot at 17.5k, just doesn’t make sense for 17k put (500 pts away) to be trading at 1.4 while 20k call (2500 pts away) to be trading at 1.75

But point taken @AlgoEye on call sellers buying deep otm calls for margin benefit and thereby creating demand. Thanks

I came across this on the internet while looking for answers. While I don’t follow sensational views from business news anchors, couldn’t find any better explanation for the put premiums. However on going through the comments on the thread, realised it’s again just a trp trap

Since the market is bearish, people want to sell calls. They buy deep OTM CEs to hedge their position and decrease the margin outlay.