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This is a copy of my newsletter sent to my subscribers on Tuesday, Oct 31, 2023
Have you observed that most of the time the Put options especially the far-from-strike ones are costlier than the call options of the same distance? In this post, you will learn why it is so.
This is mainly due to volatility skew – the difference between the implied volatility of out-of-the-money, in-the-money, and at-the-money options. India VIX indicates volatility in the markers (high VIX means high volatility and low VIX means low volatility), however, every strike option has its implied volatility.
The further out-of-the-money options have larger implied volatility in terms of percentage.
This is the reason why the percentage of increase or decrease of the option premiums does not exactly match with India VIX increase or decrease.
Let us take an example.
When markets rise traders get optimistic and buy call options – but not many buy further out-of-the-money options because they want to capitalize on the moment knowing very well that profit booking may enter anytime soon. However, this is not the case with put options. When a stock falls traders know that an 8-10% fall is common. Most of them start buying further out–of–the–money options. Due to increased demand thenput options prices increase more than the call options of the same distance.
Here is a real LIVE example.
Date 31-Oct-23. https://www.nseindia.com/
Current Nifty price:
Expiry date: 30-Nov-23
For the Call option, I am adding 1000 points to 19100. 19100 + 1000 = 20100
Here is the price of 20100 CE – LTP is 13.20:
For the Put option, I am subtracting 1000 points from 19100. 19100 – 1000 = 18100
Here is the price of 18100 PE – LTP is 27.40:
Can you see there is a huge difference? 27.40 – 13.20 = 14.20. See that the difference is more than the price of the call option.
Check implied volatility also. Therefore put options are costlier than call options especially when the markets are normal and falling. However, the call options do not have such a huge difference when the market is rising.
This post has been long pending for many years. I must have received this question from many traders and I promised them that one day I would write an article on this and post it on my blog and also email it to my subscribers.
What a relief.
I hope you have learned why there is a difference in pricing between call and put options of strikes with the same distance from the stock.
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