I am new to calender expiry trading. I am making some strategy on sensibull but advice related to that. For example, if I make strategy purchasing Nifty Dec 23000 PE @830 and selling June 23000 PE@ 659. Here the total premium paid will be 171 points (830-659) and thus maximum loss should be 12825 only. But in payoff graph, a loss of Rs 50,000 of showing if Nifty reaches 20k, which I am not able to understand.
Suppose on June expiry day, even if nifty expires at 20k, then my june PE will expire at 3000, giving me loss of 2341. But then I have same strike PE purchased which will also increase. That December 830 PE would also reach around 3000 levels and since more time is left, so maybe more due to premiums. Then why 50k loss. I am not able to understand this. I have attached screenshot for reference.
I did some research on this and it seems Deep ITM may become less than intrinsic value.
Apparently, Theta of options become positive. You can check Zerodha - Black & Scholes calculator for theoretical price too.(Sensibull does get the theta wrong here for the target) As each day goes by, if NIFTY stays the same, you get more money(the opposite of OTM and shallow ITM options).
This doesn’t seem to be just theory though. Right now, 27000 DEC24 PE is priced at 3133. With NIFTY @22828, the intrinsic value is 4172 and it doesn’t seem to be due to liquidity either. So, yeah, you’ll probably be making 50k loss or even more, if iv reduces. You’ll be making less loss, if iv is more. For this option to be near 4000, iv needs to be near 40(Think 1000 point gap down like last Monday, where indeed, it was near 4000).
Edit: This doesn’t seem to hold true for CEs. 19000DEC CE is still at a premium. Apparently, it’s because futures always trade at premiums rather than at discounts.
