Option price query


Suppose you have bought an atm put option, and nifty falls 100 points. Now, before entering the trade, this was atm, but now it has become itm, so does it start behaving like future ? As in one getting points as good as future ? Earlier, if price moved 50paise for every 1rs downside movement, now it will move higher than 50paise for every 1rs movement in nifty future because it has become itm/deepitm ?

Depends on Delta. ATM Option has Delta of 0.5 and as you go ITM Delta increases, for Option to behave exactly like Futures it will have to be Deep ITM, atleast 5-6 strikes deep.

Okay, so if one holds onto the put option, the delta will keep on increasing as it moves itm.

To mimic the performance of future without buying a future is to sell or buy synthetic future…i.e. buy atm put and sell atm call…same strike…that will be like selling a future having delta of -1

Similarly buying atm call and selling atm put makes u give same payout as like of buying future…

Low charges than future is the benefit of this setup.

All the best :slightly_smiling_face:

Exactly, but I also feel one can get 50% movement of futures with atm option buying in the same direction. That way, profits reduce and so do stop losses. At the end, futures end up giving more money on paper, but minus the expenses it is as good as buying atm options.

My point was when atm gets a bit itm when futures move like 100 points, the payoff is much more than initial 50% of the move, as it goes more and more itm, one would make as good as futures. Today, it happened with 11150 ce option. So does this happen every time is my question ?

11150 ce or for that matter Nifty option with 50 strikes is fairly illiquid with high impact cost.
Secondly, price of options is not dependent not only on moneyness i.e. whether itm or atm… but also subject to change as per theta and vega…

Longer the time left (theta) , higher the effect of volatility or vega and vice versa on it

So may be option strikes illiquidity combined with increased volatility and theta no. might have caused the option to be priced higher than normal but generally it won’t have same rate of pay off.

The same thing happened today. Before Nifty futures broke 11270, Nifty 300 pe was moving 50% with it. From 11270 to 11170, Nifty moved 100 points, but put gave 67rs instead of 50rs. So I think once an atm option gets itm, it starts moving with nifty futures. I don’t have any understanding of theta,vega and all that…what would you say ?