A small market structure change created a big difference in option calendar spreads.
-
The Nifty weekly expiry on 4 August provided an interesting example of how changes in market structure can influence option pricing.
This was one of the first expiries after the introduction of NSE's Closing Auction Session (CAS). Under this new mechanism, the official closing price of the cash market is determined through a closing auction, with the aim of improving price discovery and making the closing price more representative of market demand and supply.
Until around 3:15 PM, the Nifty ATM straddle was trading near 100 points, and the near-month Nifty futures were trading at roughly a 100-point premium to the spot index (contango).
After the cash market entered the Closing Auction Session (CAS), index derivatives continued trading until 3:40 PM. During this period, the futures basis changed significantly, with the market moving from contango to brief backwardation by settlement.
This had a noticeable impact on calendar spread pricing.
Under normal market conditions, Nifty futures trade in contango most of the time. As a result, ATM Call Calendars generally close at a higher value than ATM Put Calendars. During periods of backwardation or unusual volatility, however, the opposite can occur.
That is exactly what happened on this expiry. Because the futures curve shifted into backwardation near settlement, the ATM Put Calendar closed at a higher value than the ATM Call Calendar an outcome that is relatively uncommon in normal market conditions.
This is a good reminder that calendar spread pricing is influenced not only by implied volatility but also by the shape of the futures curve (contango vs. backwardation). As market structure evolves, understanding these relationships becomes increasingly important for options traders.
