Option premium COMPUTATION IS BASED ON FUTURE OR SPOT

[mxtraj]

The required input for calculating option premium is future price in few models and spot in certain models. .BS says about spot price only. Can THIS BE DISCUSSED

[velu]

for stocks , we have to follow future price … it’s a no brainer here

for monthly index options , follow index future …
but for weekly options , take approximate guess between spot and index future

[lotus]

Dear @mxtraj, As, BLACK SCHOLES says about spot price only.
This is applicable for both STOCK & INDEX.
PREMIUM IS BASED ON OPTION GREEK IV, Day’s to EXP, DIVIDEND, Interest Rate,Strike, etc.
SO not on FUTURE.
FUTURE PRICING is totally different.

[siva]

@Sensibull

[mxtraj]

sir your reply /comment pls

[mxtraj]

snadeep/lotus
thank u for ur reply.
One of the inputs for computing the theoretical price of an option is current price.
Some use spot price and others use the future price of the corresponding expiry.
many leading apps use future price as input rather than spot inex/scrip
mxtraj

[lotus]

Well in that case INTEREST RATE is 0 ZERO, If you take FUTURE price as theoretical value.
You will get approx same result/ OPTION PREMIUM VALUE.

[mxtraj]

that was a logical reply
tks

[aravindvlad]

I draw your attention to this from @sensibull

ITM Call option priced way less than the intrinsic value

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 pri…

and this (same thread)

ITM Call option priced way less than the intrinsic value

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.

and this as well

ITM Call option priced way less than the intrinsic value

@Spec_guy One last point 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.

[mxtraj]

Hi! spec guy
thanks for the pains taken in explaining