A Simple Pricing Model for Call Options Traded in NSE Nifty Option Market : Theory, Model & Empirical Test

A simple option pricing model is suggested based on correlation of underlying stock with actual market behavior as reflected by market index, thereby market factor coefficient to enable the traders to quote the prices. The simplicity and ease of the proposed model may appeal to the traders, operators and other market participants. Daily option Prices at different strike prices for the underlying stocks are calculated by applying daily Market Factor coefficient, exercise price, strike price and time to maturity. Model is tested with call option prices of select underlying stocks which constitute Nifty index of the National Stock Exchange of India. Option prices produced by the proposed model are close to the actual price for varied range of strike prices. The Model works perfectly to call in-the-money, at-the-money, and near out-of-money. Pricing difference is tested through tools such as Mean Error, percentage mean error, Root Mean Square, Thiel's U statistic. Regression analysis is also explored with traded prices on Call option prices obtained by the model. The simplicity and workability of the proposed model are its main advantages over the existing models