Hi ,
Do option premiums reflect the effects of inflation ? Like for example, over the last 10 years, has normal inflation been prices into premiums?
I think I have read the word premium as petroleum 
short answer is “kind of”.
Futures contracts are leveraged, and historically, the premium on it is termed as “cost of carry”.
So if you are long 1 lot of Nifty Futures, you are only paying inr. 1L or so as margin but the contract value is say 9L.
The seller, usually The Arbitragers, will sell the contract trying to price in that cost of carry, usually above the risk-free rate.
Ofc premium varies with demand too, and in bull markets premiums go over 100pts a month what we see now and in bear markets we saw days with premium at 10pts and in one case next month Futures contract was trading at a discount to current month.
WTI crudeoil for a specific month’s Futures contract saw a Contango.
Options premium calculators also price it with the risk-free rate component as one of the inputs.
Great answer, Yes, Rf is factored in Black scholes but how does that increase the premium quoted? for example all else kept equal including the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility , would the value of a call option of Reliance, say, at 5 strikes above underlying in 2012 be lower than call option today?
haha
1 Like
we can never pinpoint, in that sense.
inflation cant be just upwards as a single factor.
Mkt participants have increased, more digitization, cheaper infra, better tech etc.
Outgoing call in 2000s was inr. 20-25/min. Today even in basic plan it is inr 1/min.
Earlier most contracts were cash settled, now we have physical delivery, more expiry margins etc
To be honest, it is like trying to understand every mkt partipants thought process by one person. it wont make much sense. Like instruments tick every second, what are they pricing in every second?
hmm maybe so
Let’s see if someone else has a view on this