ITC CALL OPTIONS PREMIUM CONFUSION


#1

today i bought itc 285 call option at rs 3.60 when rate was 281.4,but after results itc rate was 286 ,it was above strike price increased by 4rs,but why the premium increases only by 0.6paisa,can anyone tell me the valid reason and also advice?


#2

@sumeet_arora Premium follows price of current month fut contract. Itc fut is trading at a discount.so call premium has not increased much.


#3

ok,but why future cont trading at discount? and when it will be trade at premium?


#4

Hey @sumeet_arora

Normally, it is in premium

Future price = Stock Price * (1+r)^t where r is the interest rate and T is the days to expiry/365. So future will always be slightly above the stock if there are enough number of days to expiry. All that is good in theory.

But here is the catch.
If you are a 95% percent sure that ITC will go to 260 by end of May, you won’t mind selling the future to me at 280 even when the stock is at 284, right?

Similarly
If you are a 95% percent sure that ITC will go to 300 by end of May, you won,t mind buying the future from me at 288 even when the stock is at 284, right?

Basically stock versus future price tells me the combined market view of all the participants implicitly. So a discount indicates short buildup.

It can also indicate a dividend payout. So if ITC is at 285, and there is a dividend of 5 rs declared, futures can trade at a discount - around 280