Index options tell a lot about trade direction and is one of the crucial ssentiment indicator.
The call and put options with futuresoffers a large number of trading strategy for traders.
The basic thing for the options is the volatility and lets see whats happening with volatility now.
The Historical 10 D IV's are trading lower than the Implied IV's now. Major interpretions are:
1. This particular combination more often leads to fall than rise.
Although the lower the IVs the more upside for Indices but at historical lows the relationship changes.
Why? Complacency leads to fall in markets.
2. When the Historical IVs are lower than Implied IVs then it makes the option buying costly for the potential buyers. This is because the options are pricey on historical basis as premium increases.
This could lead to increase in selling of calls why so?
Well, the big institutions are already fundamentally long by having stocks in their portfolio so they to make alpha they have to sell call then sell puts.
3. VIX index needs to be watched during such times and can provide a real good view on the direction change. How? Watch for the day when VIX rises less when index falls.
Let me know what are your comments on above thinking.
Further to add: The historical IV's generally trade lower than IV's.
But the major trading points are when the Historical IV's hit the lower band of their low values.
Otherwise there are no major trading strategies I can think of based as I tried the crossover and that was also not much feasible on profit side.
Related Posts:
The call and put options with futuresoffers a large number of trading strategy for traders.
The basic thing for the options is the volatility and lets see whats happening with volatility now.
The Historical 10 D IV's are trading lower than the Implied IV's now. Major interpretions are:
1. This particular combination more often leads to fall than rise.
Although the lower the IVs the more upside for Indices but at historical lows the relationship changes.
Why? Complacency leads to fall in markets.
2. When the Historical IVs are lower than Implied IVs then it makes the option buying costly for the potential buyers. This is because the options are pricey on historical basis as premium increases.
This could lead to increase in selling of calls why so?
Well, the big institutions are already fundamentally long by having stocks in their portfolio so they to make alpha they have to sell call then sell puts.
3. VIX index needs to be watched during such times and can provide a real good view on the direction change. How? Watch for the day when VIX rises less when index falls.
Let me know what are your comments on above thinking.
Further to add: The historical IV's generally trade lower than IV's.
But the major trading points are when the Historical IV's hit the lower band of their low values.
Otherwise there are no major trading strategies I can think of based as I tried the crossover and that was also not much feasible on profit side.
Related Posts:
Hi Jitender, I completely agree with the fact that such extreme low IVs typically indicate times to exit the markets rather than buy; the reason as you have very correctly indicated to be complacency; in the short term, however, one can have extended periods of low voltilities and positive returns... I surely think that these low levels of IVs are unsustainable over a long enough time horizon and through the year 2011, we definitely look headed towards a higher volatility regime.
ReplyDeleteVery nice observation.However what would be your view on 30 Day HV.Like u mentioned Insti sells options when IVs are greater than HVs to generate Alpha,i guess it might be rather Beta,and majority of time IVs are greater than HV around 75% time in Nifty.
ReplyDeleteHi Manoj, I used 10D as it is more responsive to the trend change so it is better in detection of trend.
ReplyDeleteRegarding the second point I should say that this particular kind of trade happens only near the lows not any other time.
Hi Jitender..Just stumbled on to your blog and am impressed. I have been trying to trade options by buying options whose IV is at a fraction of the HV. But I can't find the data on current IV and historic IV's of stocks anywhere. Can you help? Also, can you tell me which charting software you are using to study the IV's? Thanks - Shankar
ReplyDeleteHello Sankar,
ReplyDeleteGood to know that you liked the blog.
Well,the strategy you mentioned in the comments above looks good on paper but have you back-tested it. I mean that the strategy has some weak points like the IVs as such have clustering property so it gets difficult to trade in the above way also the liquidity in Indian stocks is a issue.
To get the stock IV's is a real difficult task for a retail player in India. I use bloomberg.
But I think there are some custom excel sheets which can get you that but is a bit cumbersome. You search for the excel sheet volatility calculation in Google and I am sure you will get some solution.
Jitender,
ReplyDeleteThanks for the prompt response.
I am actually able to generate the stock IV's. The problem is that I don't have the HV's for the stocks or even Nifty. Does Bloomberg provide this?
Also, is the chart you have displayed from Bl;oomberg?
Its very simple to get HV. Just plug the formula and its there. HV is derived from the Option price, interest rate and all of them are fixed so HV can be derived.
ReplyDeleteJitender,
ReplyDeleteI don't think I put my point across clearly.
What I want to do is take today's IV and compare it to the last 5-6 years of historical Volatility of a stock/index. So I need the historical volatility figures over a period of time. I have the IV's at today's prices but don't have the HV over a period to com[are it with...
Hey its better we take this discussion offline.
ReplyDeleteSend me your email id.