ITM Call option priced way less than the intrinsic value

Can somebody tell me why hexaware technologies options are priced much less than their intrinsic value?

Hexaware stock price is 442 and and 400 may call should have a price above 42 (including time decay) but option is priced at 20 RS, almost half of the intrinsic value. Can somebody explain why it is so?


Why should the price be above 42?.

I can give u the answer right away,but I want u to do work to understand it.

Start with how options are priced and who prices them.

Thanks, but my basic understanding was that a ITM option should carry it’s intrinsic value plus time value to the minimum and at expiry it will carry it’s intrinsic value (time value=0). What am missing here?

1 Like

Hey @Spec_guy The question caught me eye. Yes, you are right about the mispricing if you look at spot price. Interestingly there were enough calls getting traded today at around 5 Rs. Puts are getting traded at 8+.

BUT the futures on Hexaware May is trading at 411 when stock is at 442. Stock was up 6% today but futures was up only 3%. You can price options with futures as input if you set r=0 in Black Scholes. If you do that, you can see there is no mispricing!

Moral of the story: Always price options with futures as underlying as r=0

For ease, you can use our calculator.
Sorry about the self promotion :smiley:

Why is futures so below the spot?
One reason can be a big divided coming. But that’s unlikely here. I am not sure if there is a dividend payout or some split etc coming, in this stock. But IF it is not a corporate action, then here goes:

Everything below this line is a guess
If its not a corporate action, this is an insane short build up. Someone knows something we do not. Thats what is dragging the future down


Thank you so much for your answer about the option price based on the futures price. Really appreciate that and it makes sense, though bit worried about the short buildup slight_smile:

What do you think the option price should be assume that today is expiry? Will it be 42 or 20?

You’re welcome @Spec_guy
Expiry day, spot and future will converge to the same level. So if spot = 442, future will also be 442. Hence, on the expiry day the option will get settled around 42 Rupees.

PS: the 400 puts are trading at 8+ rupees. I said 30 in my last post, that was a lookup mistake. Sorry about that.

1 Like

Clean! Thanks.

1 Like

One last point :slight_smile:

Also everytime you have a doubt on the prices of options, just take the call and put for the same strike.

Here, 400 CE = 20 Rs
400 PE = 8.8 Rs

Do C-P+ K where c= call, p= put k = strike - Put call Parity

So C-P+K = 400+20-8.8 = 411

Which is equal to future price. Put call parity holds, and all is well

Have a great weekend.


Thanks :slight_smile: that comes out correctly.

Hello @Sensibull, great explanation! I just looked at the historical data and there actually was a dividend lined up (don’t think if it was a big dividend, at least thats what the historical dividend data suggests) . 14th May’18 was the ex-dividend date that was to be paid on 18th May’18. So, can this be considered a good enough possible reason for future to be so below the spot?

I admire your insight and very patient and intelligible replies. All of your answers add maximum value.

1 Like

We are deeply indebted to sensibull for such easy to understand explanation… This shows the clarity of thought. Great!

Yes. Dividend/ expectation of dividend is a common culprit for this. But there can be genuine negativity as well. Like Jet Airways. Future trading 10 rs below spot at 230-240 difference. Don’t think that company will give dividends for a long time :slight_smile:




Thanks again @Sensibull… Really helpful!

Respected @sensibull can you provide example of some kind of trades by which we can take advantage of such negativity like jet airways which is reflected in its derivatives.