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?
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?
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
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
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?
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