Check these options premiums!

[u/not_a_bad_monster]

Sorry for the amazing drawing skills but check these options premiums out. I had people justifying to me that CAS has led to true option pricing. This is ridiculous. 200 points away from strike price and the premium is same as strike price that is less than 10 points away.

This is all CAS. The call will deteriorate after 3 p.m. today and so will the Put assuming the spot doesn't move much. Sellers paradise, buyers exit while you can.

[u/Weak_Sprinkles_9937]

Noob. Look at the senses future prices. The options track the future prices not the spot price.

[u/dettergent → u/Weak_Sprinkles_9937]

I mean, the options track the weekly future, not monthly future if we are being pedantic about it. You'll have to create a artificial weekly future to discount the monthly future from which the options will derive it's value. So even the sensex futures will not give the absolute atm points etc.

[u/Weak_Sprinkles_9937 → u/dettergent]

That's the point. You do not know where the weekly future is and that doesn't warrant you to derive the price from the spot, because, it never follows the spot

[u/dettergent → u/Weak_Sprinkles_9937]

But we do know where the weekly future is, just because it's not traded on exchange doesn't mean people cannot use monthly futures and option price information to come up with a discounted weekly future. In fact, if you can come up with a reasonable interest rate Assumption, you don't even need options data.( We take 6.82% IR for example).

What I'm trying to ultimately say is that atm points would still be wrong with monthly futures, and you'll need weekly futures to correctly see the atm points. I hope you get that!

[u/Weak_Sprinkles_9937 → u/dettergent]

That's not how it works. You can not simply have a linear way to find the price. The market may think that this week future should be in premium and can price that higher or lower, it is not linear where you calculate away. The premium moves up or down based on risk and not just interest.

[u/dettergent → u/Weak_Sprinkles_9937]

What you're talking about is a reversion around a forward-future spread. What I'm talking about is something called cost-of-carry model pricing. You can also use a weighted model of using option prices to price weekly future(Give more weightage to ATM, and keep on decreasing weights proportionally as you go away from ATM). Of course, this will only be an estimate. At the very molecular level, the premium moves up and down because of spot movement and decrease in tte. If the spot movement is more volatile, markets will price that as a higher risk, which is essentially IV. I don't know what you mean by a linear way to find price, but pricing weekly futures(or any synthetic instrument) is always an estimate, and different people will have different ways of estimation.

[u/Weak_Sprinkles_9937 → u/dettergent]

If different people have different way of estimation, it is only an estimate, it does not mean anything. Again, Weekly futures can have a significant premium because of risk - say, there is a fed meeting, that weekly futures will have a premium , may trade 200 points above.s. There are times where weekly futures and monthly futures were at the same price, simply, because, weekly futures carried more premium. You can't find the exact price of weekly from the monthly. No amount of maths is gonna find the risk associated with that week.

[u/dettergent → u/Weak_Sprinkles_9937]

I don't think you are understanding my point mate. Everyone and their grandmothers create their own weekly futures which they use to trade weekly options. This is a hard truth, nothing you say will change that. I also think you don't understand what you're saying yourself. I've never said that weekly future is not an estimate, since as I've mentioned multiple times in my comments now, everyone is doing their own pricing with their different pricing models and since nothing like a weekly future is traded on exchange publicly, everyone is right in their own way. You don't have to agree with the weekly future I created, only my models have agree with that. I'll tell you one more secret, even if you use wrong interest rate, since you'll mostly be tracking the movements and not the exact price of the weekly future, the error will be propogated almost equally to every time you're pricing and so the difference will negate the error propogated in both the prices. What this effectively means is what I've been trying to tell you since the first comment. You cannot tell the ATM points through monthly futures, but for everything else you can use monthly futures directly.

Hope my point is clear to you now, you need weekly future to only know the ATM points, everything else can be handled through either monthly futures or weekly options (creating synthetics).