From 31st May 2024, I See that option premium of NIFTY and BANKNIFTY has increased a lot . Earlier, i used to buy 1 lot of in-the-money NIFTY option contract in Rs.100 - Rs.130 . My target was 20-30 rupees per lot per day.
But from 31st May 2024 , same in-the-money option contract for Nifty Index is trading for Rs. 300-400 .
Why the price of options has increased so much suddenly ? Will it reduce the profit margin per lot per day for Intraday traders ?
The significant increase in the option premiums can be attributed to a few key factors, primarily centered around the concept of option pricing and market volatility.
Let me break it down for you in an easy-to-understand manner.
Option Pricing Factors:
Option prices are influenced by several factors, commonly known as the “Greeks.” Here are the main ones:
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Intrinsic Value: This is the difference between the current price of the underlying asset (NIFTY or BANKNIFTY in this case) and the strike price of the option. For in-the-money options, this value is positive.
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Time Value: This reflects the potential for the option to gain value before expiration. Generally, the longer the time until expiration, the higher the time value.
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Volatility (Vega): This measures the sensitivity of the option’s price to changes in the volatility of the underlying asset. Higher volatility usually increases option premiums because there is a greater chance of significant price movement.
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Interest Rates (Rho): This affects the cost of carrying the underlying asset, though its impact is typically less significant than volatility.
Increase in Volatility - India VIX:
Since the 1st week of May 2024, there has been a noticeable spike in the VIX. This spike is primarily due to the uncertainty surrounding the upcoming election results. During times of political uncertainty, markets tend to be more volatile as investors anticipate potential changes in government policies, economic reforms, and overall market direction.
Impact on Option Premiums:
As the India VIX rises, the implied volatility of options also increases. Since volatility is a crucial factor in option pricing, an increase in volatility directly leads to higher option premiums. This is why you are seeing the in-the-money NIFTY option contracts, which previously traded for Rs. 100 - Rs. 130, now trading for Rs. 300 - Rs. 400.
Effect on Profit Margins for Intraday Traders:
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Higher Capital Requirement: You will need more capital to purchase the same number of lots.
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Risk and Reward: The increased premiums reflect higher risk due to greater volatility. This means that while there is potential for higher rewards, there is also an increased risk of larger losses.
I have seen this chart . If VIX is the main reason the increase in premium should have started 3-4 days ago. But there is no reason why it suddenly increased 3 times today. We have to wait and watch what happens after 4th June.