Nifty IV and HV: Present Analysis

Nifty's HV of 10 days went below 10 and then rebounded. The HV (10 days) has been a good indicator for reversal from the top.

As can be seen the index reversed from the Jan top when HV (10) made a low below 10.
The HV (10) made 52 week low in July but the index did not fell sharply instead stayed in range abd broke out later.

This time the HV (10) moves below 10 with index also at trendline resistance. Nifty has surely seen given up 3% from the top as of now.
Analysing the HV of 30 days for Nifty though tells a different picture.

The chart shows HV(30) and IV's in a uprising channel which we discussed earlier also. Nifty IV moving higher. The difference of HV (30) and IV is less than 1 indicating mean values for them as IV seems to be optimally priced in.

The Nifty IV from last 2 weeks are consistently below 20 levels which on break of 20 can lead to one more burst higher.

As of now the options and IV's indicate more of range trading. For any breakout trades based on HV and IV one could watch the HV (10) cross of 15 and IV's move above 22 can be bearish for markets.

Related Posts.

Nifty IV's what are they foretelling

Nifty VIX move in tandem on uprise

VIX index is generally regarded as fear index. The VIX represents the expectation of the volatility of the market through the options premium.

The general rule is that when Index falls the VIX index rises indicating the rise in premium paid for protection. Thats a simple theory but what if the VIX rises when the Index also rises. Well that move indicates a lot about whats happening in options.

Taking  today's example the Nifty moved up more than 2% and the Indian VIX index was up >3%. Chart.

This clearly shows that the some one was caught on by the today's move and that's why the rise in options premium.Analyzing the options data for Nifty index there was huge OI decrease in 5600 call which was crossed by Nifty spot and the index closed above that mark by 50 points i.e. 1%.

Worth noting is that there were only 2 15 mins candle which were -ive after Nifty crossed 5600. That shows the strength in the move. And this led to the covering by the call writers and thus rise in premium translating into rise in VIX.

All this was because 5600 was regarded as the line separating the bulls and bears. See post here (Extreme pessimism) and post here.

This move is exactly same as when Nifty crossed the 5500 in Sep after gap up opening.

Related Links on IV:
Nifty IV moving higher March 8

Nifty IV and HV: Not painting good picture Feb 7

Which index is more volatile Nifty or SP500? Dec 3

Nifty IV moving higher

Nifty IVs cooled down after the budget and from the last update on 26th Feb. The current IV is higher than the 30 Day and 60 Day HV's.

The IV are not only higher than average but also highest among major stock indices of the world. Here the snapshot:

Worth noting is that the 1 month IV for the Asian Indices are higher than the 3 month IV's.

Looks like funds are bearish for near term but see the indices bullish for next 3 months.

Plotting Nifty IV ride.

Index IV’s generally shoot up on events like the coming budget for India. 

The current IV is at 29 levels, although not new high for the year but highest for last 6 months.

Plotting IV for Nifty shows a very peculiar pattern.

While the IV’s were declining from May highs of 34 to 52 week at 13 in September just when the Index short off to new highs. The IV’s then broke out of the falling trend line.

From September onwards they have been on a very different path. The initial rise was contributed by the perpetual writers getting caught off guard. After that the Nifty rose to high in early Nov and IV declined to below 20 levels. It is then the whole ride has been turbulent.

The decline from highs of early Nov led to rise in Nifty IV as no the fall off was sharp 7-8% of index.

What is worth mentioning was that the Options market was factoring in the Santa rally as the Nifty IV were declining from high of 23 on 12^th Dec to 15 by Dec end. The index rose by 4% during that period.

Declining IV shows complacency as the buyers are rushing in for protection.

The start of New Year 2011 has been one of the most tumultuous rides in index.

The Index declined 10% in Jan followed by another 3.5% decline in Feb. No wonder that the Nifty IV bounced from lower band at 15 and now at way above the upper band.

Once the Budget event is over one the Nifty IV can possibly cool down to mid band at 20 levels. But that depends a lot what is there in Budget.

So what in the options market betting on for Budget?

The current Nifty SKEW of move of 2.5% in index is at 3 Volatility points.

Nifty IV and HV: Not painting good picture

Nifty IV and 10 Day Historical Volatility are above 20 levels.

Both of them staying above the average levels indicates the fear in market and is leading to lot of protection buying. This is evident in the PCR ratio and the Put build up at 5400 levels.

This high levels of volatility is only a recent event and does suggest some shift happening in market.

The Indian VIX is also trading at the upper range of last 6 months. The index has resistance at 25 levels if that is crossed then we can see more and more volatility with sudden reversals.

For all this the crucial level is 5320. ??????  Yeah 5320 as the average price of the 5400 puts is Rs 80  so put writers will be in loss at break of  (5400-80) = 5320 levels.

Watch any close below that.

Nifty IV's what are they foretelling

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:

Nifty IV moving higher

Plotting Nifty IV ride.

Nifty IV and HV: Not painting good picture

 

Which index is more volatile Nifty or SP500?

There is a perception that US markets are more stable then the emerging markets.

Well it is not the case always.

The best barometer of volatility is the VIX index which is regarded as fear index. It is calculated from the options premium. More on this and the VIX related ETF's later.

I have compared the US VIX and Indian VIX on a normalized basis. The IN VIX has been consistently lower than the US VIX for last 9 months. In September the Indian VIX was near all time lows in IV's.

The white line is the US VIX and the red line is Indian VIX measure.

This can be attributed to better returns of Indian markets than to US markets which has seen huge swings based on bets on the economy while Indian economy has been more stable.

Also the huge FII inflows show the confidence in the Indian and other emerging markets.

Does this mean that Indian markets are less volatile than US markets? In some sense it is true while not completely.A part of it because of slightly different way calculating them but thats only a small part.

Larger picture still  shows that the Indian markets have been less volatile atleast this year.
Next time I will do the same analysis using other technicl analysis volatility tools.

Nifty 10 Day historical IV's are trading near 52 week lows level last seen in Jan'10.

The coincidence is in 2 ways:

1. I n Jan Nifty made a new high at 5300 levelsand this time also Nifty is at new highs of 5400 levels.

2. Mid Jan was the result season and this time also the result season is going on.

The 30 Day IV's are also inching lower which is also another point to observe.

All the above advises caution as there is heavy Put written at 5300 and 5200 levels.