Option Valuation

-Shravan B R
Oriental Bank of Commerce
Strike Price 115.00
So 115.00
r 0.085
t 0.250
Dividend 10.00
Dt 0.125
Present Value of D 9.89
Standard Dev 2.26%
Xe-rt 112.58

Valuation of option as per Basic Model (Without dividend)

Call Option

If Actual Call Premium is above C by Rs. 3

If Actual Call Premium is below C by Rs. 3

Put Option

If actual put premium is above P by Rs. 3

If actual put premium is below P by Rs. 3
Since the calculated premium is 0, the actual premium can not be less than P. So arbitrage
opportunity does not exist.

Basic Model With dividend

Call Option

If the actual call premium is above C by Rs. 3

If the actual call premium is below C by Rs. 3

Since the calculated premium is 0, the actual premium can not be less than C. So arbitrage
opportunity does not exist.

Put Option

If the actual put premium is above P by Rs. 3

If the actual put premium is below P by Rs. 3
PCP Model – With dividend

If Actual call premium is above C by Rs. 3

If actual call premium is below C by Rs. 3

Since the C is 2.42, the actual premium Rs. 3 below would be negative and hence there
doesn’t arise arbitrage opportunities.
Put Option
If actual put premium is above P by Rs. 3

If actual put premium is below P by Rs. 3

Since the P is zero, and actual premium cannot be negative, no arbitrage opportunity
arises here.
PCP Model – With dividend
Call Option

If actual call premium is below C by Rs. 3

If actual call premium is below C by Rs. 3

No arbitrage opportunity arises since the actual call premium cannot be in negative.
Put Option
If actual put premium is above P by Rs. 3
If actual put premium is below C by Rs. 3
Binomial Model
If the actual call premium is Rs. 3 above the C

zzz
If actual call premium is Rs. 3 below C
Black and Scholes Model

D1 1.88
D2 1.87
N(D1) 0.97
N(D2) 0.97
C 5.83
P 3.41
N(-D1) 0.166
N(-D2) 0.166
P (BSM Value) 0.40
Z(D1) 0.07
Z(D2) 0.07

Option Greeks
Option Delta 0.97
Option Gamma 0.05
Option Theta -0.026
Option Rho 0.273
Option Vega 0.039

Option Delta - For every 1 option, 0.97 shares must be hedged in the spot market. So, if the
spot price increases by 97 paise, the option price would increase by Rs.1

Option Gamma - Gamma of 0.05 indicates that Rs.1 change in the spot price leads to 0.05
(5%) change in the Delta.

Option Theta - Every one day reduction in the expiry, option premium would reduce by 2.6
paisa.

Option Vega - If the volatility of the stock changes by 1, the option premium would change
by 0.039.