Since ancient times, "contracts" similar to "options" have been in practice. Thales of miletus, an ancient Greek mathematician and philosopher was the first apparent "option" buyer [1]. On a certain occasion, Thales assumed that production of "olives" would be higher than expected, and thus during the off-season, he acquired the right to keep hold of some olive presses for the following olives harvesting season. When the final climax approached, the olive harvest was more enormous than expected; he executed his right of options and took hold of the presses, rented out a much higher price than he paid for his 'option'. Derivatives are financial contracts that attain value from something else, known as underlying securities [2]. As we generally know, underlying securities may be stocks, currency, commodities or bonds, etc. There is a general assumption about the relationship between the prices between underlying assets and futures and those arbitrageurs maintain solely [3]. On a smooth sailing of this relationship, investors can fix these markets as ideal substitutes and conclude that trading in these markets is driven by expediency and the price tag. Unfortunately, many studies have so far proven the presence of considerable deviation between futures prices and consequent theoretical values, resulting in "carry cost".
In the Indian capital market, futures and options are commonly traded derivatives and NSE enjoys a monopoly in derivatives trading, holding the upper hand in dealing with impacts on risk management. NSE introduced trading in the Nifty 50 index option in June 2001. Since then, NSE has provided index option contracts on 9 major indices, among them Nifty 50, Bank Nifty, Nifty Midcap 50, and Nifty IT more frequently trade index options [4]. In 1973, Black, Myron Scholes, and Robert Merton developed a theoretical option pricing model that fascinated traders and popularly became to be known as the "Black-Scholes model" BSM. The practice of quoting theoretical stock index futures prices has grown widespread. Nifty futures are traded below the Nifty spot value in commodity pricing strategy, and quoting futures prices below spot prices is uncommon. Even though futures prices are lower than spot prices, physical commodity owners will soon be unable to sell their commodities at the current higher prices and profit from the price differential due to specific restrictions [5]. In the case of farm produce, before harvest spot prices may increase due to assuming shortages of supply, but ultimately the prices are reduced after reaping when fresh supplies are surplus. As a result, discrepancies in the real price of options and the prices anticipated using the formula may arise while implementing the option pricing formula [6].
Fischer Black, the co-author of the famous Black and Scholes model, attempted to address the problem of the negative cost of carry in the option pricing model by substituting forward prices for spot prices in 1976. He discovered that, in addition to the inventory carrying cost, a real forward price catches other market irregularities as well [7]. The results of Black's approach helped evaluate options on physical commodities with a common negative Cost of Carry. In this study, we attempted to predict the pricing efficiency of options prices using Greeks and the Black-Scholes formula, compared theoretical values to actual prices in the real-time market and discovered that the Black-Scholes formula produced better results for Nifty options [8].
This pricing model is universally accepted by all investors, though this model could make certain pricing prejudice in the realistic market as it provides an analytical solution for option price along with its sensitivities to risks recognized as option Greeks [9]. The options Greeks have taken for calculation are delta, gamma, theta, vega, and rho, which are sensitive to particular market variables like strike price, underlying value, time to expiry, interest rate, etc. Few researchers have also proved that the intensity of these Greeks has a simultaneous impact on options positions significantly [10]. The success of options trade mainly depends on the direction of market moves and also the Greeks dictate the movement of the option price.