Discrepancy in Intraday Option Pricing

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One of my trader friend asked me following question with reference to intraday pricing of option (NIFTY DEC-10 6000 PUT).

Following table lists the price of NIFTY Spot and NIFTY 6000 PUT chain on 7-Dec-2010,

NIFTY SPOT                         DEC 6000 PUT

Open                     5995                                       104

High                       6001                                       120.9

Low                        5940                                       86.55

Close                     5997                                       94.15

I did not understood how PUT close price is 94.15 (when NIFTY = 5977) less than open 104 (when NIFTY = 5995 ). Logically, when NIFTY has gone down, the price of PUT should have increased which did not happen in this case.  WHY ?

Answer – Dear trader, this is where theory and logic don’t work in the market. What you have mentioned is absolutely correct and logical. But market works on principle of AUCTION where demand and supply at any stage determines the real traded price of instrument.

At the start of trading hours, in our market, price discovery is in process and generally options are not reasonably priced at that time. As trading progresses, price gets more realistic.

Moreover, depending on market sentiment, calls or puts get more in demand i.e. when sentiment is bullish, CALLs are chased by bulls and hence higher demand for calls and hence, option sellers increase the price of calls beyond theoretical levels. Same is true for PUTs in bearish market.

In addition to these, timedecay of 1 day also reduces the option price from open to the close of a trading day.

So welcome to the reality and time to put the theory on test in real market and develop the skills.

All the best and happy trading.

One of my trader friend asked me following question with reference to intraday pricing of option (NIFTY DEC-10 6000 PUT).

Following table lists the price of NIFTY Spot and NIFTY 6000 PUT chain on 7-Dec-2010,

NIFTY SPOT 6000 DEC PUT

Open 5995 104

High 6001 120.9

Low 5940 86.55

Close 5997 94.15

I did not understood how PUT close price is 94.15 (when NIFTY = 5977) less than open 104 (when NIFTY = 5995 ). Logically, when NIFTY has gone down, the price of PUT should have increased which did not happen in this case. WHY ?

Answer – Dear trader, this is where theory and logic don’t work in the market. What you have mentioned is absolutely correct and logical. But market works on principle of AUCTION where demand and supply at any stage determines the real traded price of instrument.

At the start of trading hours, in our market, price discovery is in process and generally options are not reasonably priced at that time. As trading progresses, price gets more realistic. Moreover, depending on market sentiment, calls or puts get more in demand i.e. when sentiment is bullish, CALLs are chased by bulls and hence higher demand for calls and hence, option sellers increase the price of calls beyond theoretical levels.

Same is true for PUTs in bearish market.

So welcome to the reality and time to put the theory on test in real market and develop the skills.

All the best and happy trading.

Feel free to drop me any new question through “contact me” link.

Happy Trading

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