Hello,
Could you please help me with the payoff on expiry let say 26th december, however one leg is having expiry on 26th december and 2nd leg having an expiry on 2nd Jan, how to calculate payoff on expiry of 26th december?
@firoz_quraishi - Unfortunately, there isn’t a “clean” formula to calculate this. Assuming you are entering into a long call with further out expiry (2 Jan) and short call with nearer expiry (26 Dec), you would use the standard short call payoff formula combined with the BS modeled price for the long call.
Short Call Payoff on Expiration (only includes intrinsic value)
- Premium Received - Max(0, Underlying - Strike Price)
Long Call Payoff on Expiration of Short Call (includes both intrinsic and extrinsic value)
- BSM Price (using days until expiry, strike, current underlying, etc.) - Premium Paid
@mike thank you for quick response.
Just want to recheck if i am getting your point here.
Just below is scenario where both are long call having expiry on 26th dec, where as one leg expire on 26th dec and 2nd leg expire on 2nd jan.
We have to calculate payoff on 26th for which we have to calculate premium using BSM for payoff table on 26th expiry.
Should we calculate LTP for 2nd jan expiry using BSM considering 6 days to expiry?
| Call/Put | Strike | CE/PE | Lot Size | Premium | Expiry | Upcoming Expiry |
|---|---|---|---|---|---|---|
| Call buy | 23600 | CE | Nifty lot(75) | 328.2 | 26th Dec | 26th December |
| Call buy | 23650 | CE | Nifty lot(75) | 390.7 | 2nd Jan |
Typically, a call calendar is short the front expiry and long the back expiry so I’ll show it like that (you can modify as needed).
Assume the following:
- Nifty at 23585.
- IV of further out contract is 16%.
- Rates at 10%.
- Today is 26 Dec market close.
- Days until further out expiry is 7.
For the long call with 26 Dec expiry, the payoff would be:
- 328.2 - Max(0, 23585 - 23600) = 328.2 - 0 = 328.2
For the long call with 2 Jan expiry, the payoff / modeled price as of 26 Dec would be:
- BSM Price (23585, 23650, 16%, 10%, 7 days) = 198.90
- Premium paid = -390.7
- The BSM Price is what you could theoretically close out that contract for on expiry of the front contract.
So, the payoff on the 26 Dec expiry = 328.2 + 198.90 - 390.7 = 136.4
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@mike thank you for response.
I used the suggested concept above however i am getting difference of 4K which is consider to be on higher side as per analysis.
Do we have any hit and try to reduce this difference of 4K?
(I am doing all analysis on sensibull as of now)
That does seem like a large difference. Unfortunately, I may not be able to diagnose a third party’s application. What I’ve shared is the known way to calculate the P&L for this strategy. If you can send me some screenshots of what you are seeing in Sensibull, I can see if I can figure out what is going on sometime this week.
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@mike below is the snip i am doing analysis.
if you can help me with expiry calculation on which i am struggling with.
like i am doing calculation on 24600.
Payoff for 23,600(expiry 26th dec) : Max(24,600-23600,0) = 1000-204.6 = 795.4*25= 19885
Payoff for 23,650(expiry 2nd Jan) : Theoretical price 1045.56- 300.2* 75(Lot size)= 55,902
Total payoff= 19885+52,902= 75,787
Similarly i am doing for other strike as well and every time i am getting major difference.
Thanks. I will try to take a look into this in the next few days.