Determinants of Violations in the SET50 Index Options Pricing Relationships: Put-Call-Futures Parity and Box Spread Tests

Woradee Jongadsayakul

doi:10.5539/ass.v14n3p1

Determinants of Violations in the SET50 Index Options Pricing Relationships: Put-Call-Futures Parity and Box Spread Tests

Asian Social Science ◽

10.5539/ass.v14n3p1 ◽

2018 ◽

Vol 14 (3) ◽

pp. 1 ◽

Cited By ~ 1

Author(s):

Woradee Jongadsayakul

Keyword(s):

Transaction Costs ◽

Risk Premium ◽

Tobit Model ◽

Options Pricing ◽

Options Market ◽

Index Options ◽

Exercise Price ◽

Daily Data ◽

Before And After ◽

Contract Specification

Although SET50 Index Options, the only option product on Thailand Futures Exchange, has been traded since October 29, 2007, it has faced the liquidity problem. The SET50 Index Options market must offer a risk premium to compensate investors for liquidity risk. It may cause violations in options pricing relationships. This research therefore uses daily data from October 29, 2007 to December 30, 2016 to compare the violations in SET50 Index Options pricing relationships before and after change in contract specification on October 29, 2012 and investigate determinants of these violations using Tobit model. Two tests of SET50 Index Options pricing relationships, Put-Call-Futures Parity and Box Spread, are employed. The test results of Put-Call-Futures Parity show that the percentage and baht amount of violations in many cases are greater in the period before the modification of SET50 Index Options. Without transaction costs, we also see more Box Spread violations before contract adjustment. However, after taking transaction costs into account, there are more percentage and baht amount of Box Spread violations in the later time period. The estimation of Tobit model shows that the violation sizes of both Put-Call-Futures Parity and Box Spread, excluding transaction costs, depend on the liquidity of SET50 Index Options market measured by option moneyness and open interest. The SET50 Index Options contract specification, especially exercise price, also significantly affects the size of violations, though the direction of a relationship is not cleared.

Download Full-text

Efficacy of Nifty Index Options through BSM Model

International Journal of Recent Technology and Engineering - 2 ◽

10.35940/ijrte.c1261.1083s219 ◽

2019 ◽

Vol 8 (3S2) ◽

pp. 947-949

Keyword(s):

Options Pricing ◽

Price Determination ◽

Strike Price ◽

Index Options ◽

Put Options ◽

Black Scholes Model ◽

Exercise Price ◽

Black Scholes ◽

Long Time ◽

Optimum Price

Options are one of the products in financial derivatives, which gives the rights to buy and sell the product to an option holder in pre-fixed price which known as the strike price or exercise price at certain periods. Options contract was existed in various countries for long time, but it became very popular among the investors when the Fisher Black, Myron Scholes and Robert Merton were introduced the Black-Scholes Model in the year of 1973. This model was formerly developed by these three economists who were also receiving the Nobel prize for finding this innovative model. This model is mainly used to deal with the theoretical pricing challenge in options price determination. In India the trading in Index Options commenced on 4th June 2001 and Options on individual securities commenced on 2nd July 2001. There are many types in options contracts like stock options; Index options, weather options, real options and etc. This study has mainly been focusing on Nifty 50 index options which are effectively trade at NSE. This paper goes to describe about the importance of options pricing and how the BSM model has effectively used to find the optimum price of the theoretical value of call and put options.

Download Full-text

From funding liquidity to market liquidity: Evidence from the index options market

10.26686/wgtn.12612788 ◽

2020 ◽

Author(s):

Cheng Zhang ◽

Chunbo Liu ◽

Zhiping Zhou

Keyword(s):

Positive Relationship ◽

Equity Market ◽

Market Liquidity ◽

Options Market ◽

Market Uncertainty ◽

Short Term ◽

Index Options ◽

Funding Liquidity ◽

Daily Data ◽

The Relationship

This study examines the relationship between funding liquidity and market liquidity using daily data on the S&P 500 index options. We find that options market liquidity is positively correlated with funding liquidity after controlling for market uncertainty. Further analysis reveals that the positive relationship between funding liquidity and market liquidity in the options market is mainly driven by short‐term and deep out‐of‐the‐money options. Our results remain robust after controlling for the confounding effects of the equity market and different data frequencies.

Download Full-text

The Volatility Risk Premium in the KOSPI200 Index Options

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-02-2009-b0003 ◽

2009 ◽

Vol 17 (2) ◽

pp. 67-86

Author(s):

Hyoung-Jin Park

Keyword(s):

Risk Premium ◽

Empirical Method ◽

Option Prices ◽

Options Market ◽

Index Options ◽

Volatility Risk ◽

Put Options ◽

Volatility Risk Premium ◽

Bid Ask Spread ◽

Delta Hedging

This study examines whether the volatility risk premium is reflected on the prices of the KOSPI200 index options. By applying the empirical method of Bakshi and Kapadia (2003), we analyze the performance of delta-hedging strategy in the KOSPI200 index market. They showed the existence of the negative volatility risk premium in the S&P 500 index options as well as derived theoretical positive relationship between the volatility risk premium and delta-hedging gains. However, in the results of this study, contrary to those in the S&P 500 index options market, we do not observe the volatility risk premium. Delta-hedged gains of ATM options are not significantly negative. Delta-hedged gains are not more negative as historical volatility increases and as options' vega and remaining maturity increase. However, the notable finding of this study is that delta-hedged gains of OTM options and put options are negative and signigicant. This results can be caused by the phenomenon of overpriced puts or by market microstructure factors, such as relatively wide bid-ask spread and high tick size. In a simple examination of comparison between changes in traded option prices and changes in the Black-Scholes option prices during delta-hedging period, negative delta-hedged gains seem to be attributed to too small changes in call option prices and too large changes in put option prices. In conclusion, by analyzing the delta-hedged gains, the volatility risk risk premium seems not be observed in the KOSPI200 index options market.

Download Full-text