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Future option pricing and arbitrage opportunity

Feb 8, 2012  at 12:29:00 AM

Future option pricing and arbitrage opportunity

Normally there is a relation between the option prices(same strike) and future prices. ie.

Strike price+ call price- put price = future price

Take example of today's nifty close
5400 call at 75.1
5400 put at 121.75
and nifty futures closed at 5355.2

lets try  5400+75.1-121.75 = 5353.3  .As per our equation it should be 5355.2,  there is almost 2 point difference, lets see how we can grab this 2 points with no risk. ( for demonstration of the concept only)
Here nifty future is over priced than the normal

Hence we sell the over priced part ie sell nifty future and take synthetic long ( buy call and short put). In case of under priced futures, we buy futures and take synthetic short (sell call and buy put).

Lets try this case>

Position >  Sold nifty at 5355.2 and buy 5400 call at 75.1 and sell 5400 put at 121.75

We want to track the difference  ie 5355.2 - 5353.3 = 1.9 =  95 RS ( just only for demonstration)

Test1 > expiry at 5350
Calculation ( as we all know, lot size of nifty is 50)

260,-3755, 3587.5 =  92.5

Test 2 > expiry at 5555
-9990,3995,6087.5= 92.5

Test 3 > expiry at 5000

17760,-3755,-13912.5 = 92.5

See the locked profit, Actually nobody trades for this much low amount, but this is just for a demonstration, try with stocks and if gets a opportunity it will give decent % of safe/risk free  profit. Will try to post a good example, and i don't know what happened to the 2.5 Rs, might be a data error.Will post a good example soon, subscribe to feeds :)