Navdeep Aggarwal1 and Mohit Gupta2

Department of Business Management, Punjab Agricultural University, Ludhiana - 141004, Punjab, India
1E-mail:, 2E-mail:


While efficiency of index options market in the USA and Europe has attracted the attention of researchers for a long time, smaller and relatively new markets like India continue to lack systematic research. This paper examines the efficiency of the index options market using daily closing on Nifty 50 index options for the period of January 1, 2006 to March 31, 2009. We used three arbitrage pricing relationships, namely, call and put spreads, box spreads and call and put convexities or butterfly spreads to carry out the tests. These spreads allowed to examine the internal efficiency of the Indian options market regardless of its efficiency relative to the cash market for the stocks constituting Nifty 50 index. Various transaction costs (bid-ask spread, brokerage, taxes etc.) were also incorporated into tests. Despite incorporating transaction costs, frequent and large violations of the box spread relationship in particular were found. However, at the same time, there were fewer violations of call and put spreads and convexity, though they are less demanding tests of pricing efficiency than the box spread. As these findings are similar to those developed and large markets, the efficiency in Indian index options market can be taken to be comparable to that of old developed markets. Market frictions had a significant effect on arbitrageurs’ abilities to take advantage of violations of no-arbitrage pricing relationships. However, the size of profit potential for low cost intuitional traders might be quite large.