Revista de Economía y Negocios

Analysis of Testing the Pricing Efficiency of Options Using Greeks and BSM in Nifty Index

Abstract

D Subalakshmi* and K Prabhakar Rajkumar

The invariable development of the financial market in the contemporary world encourages advancements in different forms of financial instruments. While derivative trading has become an important element of the stock market in recent years, the significant volatility of option pricing has resulted from the massive increase in stock market activity. A derivative is a type of financial product that attracts investors from all over the world. When two or more buyers/sellers have a contract whose value is based on a fundamental asset, each change in the value of the underlying has a corresponding change in the value of the derivative contract. For fair value pricing of options contracts, the Black-Scholes option model is often used. The pricing efficiency of options is investigated in this study by utilizing Greeks and Black-Scholes model values in the Nifty Index. This study aim of this study is to determine the most significant association between BSOPM (Black-Scholes Options Pricing Model) and actual market pricing by using Greeks.

Index options are tremendously risky and gainful derivatives, which are influenced by specific market variables like index value, time to expiration, strike price, interest rate, underlying index value, etc. We calculated the call option price, put option price, and Greeks of Nifty option using the Black Scholes model for November 2018. Greeks-delta, gamma, theta, vega, and rho are analyzed concerning their impact on options positions of each strike price, through which we tried to understand and measure different dimensions of risk involved in Nifty index option positions. The study concludes that the option values have an irrelevant consequence on the market values.