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Selecting a Consistent NIFTY Option Series for Lead-Lag Tests

Article Quant Q&A · Author: tanvinagpal98
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Summary

The note addresses how to reduce a panel of NIFTY calls and puts across strikes and expiries to a daily option series for lead-lag analysis against spot and futures. One suggestion is to select the most liquid at-the-money option, using bid-ask spread as a practical liquidity guide, and keep the contract choice consistent across dates—for example, by maintaining a fixed time to expiry. Another response proposes using the at-the-money option nearest the futures contract’s delivery date.

The answer also recommends implied volatility rather than option price as the comparison measure, since price changes with the underlying level. These are practical selection ideas, not a complete sampling or econometric design. A constant-maturity series may require rolling between contracts, while choosing by proximity to a futures expiry can introduce changing maturities. The note gives no data tests or detailed handling of rolls, liquidity filters, or option type, so those choices should be specified before applying cointegration, VECM, or Granger-causality methods.

Key ideas

  • Reduce the option panel by selecting a liquid at-the-money contract for each observation.
  • Keep maturity selection consistent over time, such as by targeting a fixed time to expiry.
  • Implied volatility can be more comparable than option premium when the underlying price moves.
  • A rule tied to futures delivery dates is another possible way to choose the option expiry.
  • Rolling contracts and changing maturity can affect time-series results and require explicit treatment.

Tags

OptionsFuturesStatisticsVolatility
Full text
# lead lag relationship among futures, options and stock prices


# lead lag relationship among futures, options and stock prices












I have the data of past 10 years of NIFTY (the National Stock Exchange of India) stock, futures and options and I want to show the lead-lag relationship (which reacts first, futures, options or stocks) among the three using cointegration test, VECM model and granger's causalty.

The issue is that I don't know how to use the options data because it has both call and put out of the money in the money, and at the money prices on all days for different expiry everyday, but there's multiple data to use for any given day.

I have to perform time-series statistical analysis on the data, so I need to have only one price for one day. Given this issue, how can I perform the tests mentioned above? I am using E-views to perform these tests. I want help to get around the options data.

## Answer by Arshdeep (score 1)

https://quant.stackexchange.com/a/54948

Given that liquidity of NIFTY options decreases rather quickly with moneyness, using the most liquid ATM option is your best bet (i.e. the least bid ask spread). Although, keep it consistent in that you use the same option (i.e. say the one that expiries 3M into the future) for different days. Also, better to use implied volatility as a performance measure instead of the price itself, since that will change depending as the underlying moves.

## Answer by Trusky (score 0)

https://quant.stackexchange.com/a/54989

How about using the ATM option expiring closest to your futures contract delivery date? As in :

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.