July 10, 2018

What does implied volatility in out of money options forecast?

Any volatility index will be weighted maximum for ‘at the money’ options and by tracking these indices all we are tracking is the centre point of the volatility moving up or down.

But what about the volatility for far options which is trying to infuse some reality into the market? Let’s understand what implied volatility of ‘out of money’ options has to offer to gauge the market.

The concept
Almost 98 percent in the money put options on the Nifty are quoting an implied volatility (IV) of 13.26 percent, whereas 102 percent in the money call options on the Nifty are quoting  an IV of 10.62 percent.

Now, why would there be a difference in the IV for equidistant options? The answer is:

1. A put option seller is seeking higher compensation (premium) than an option seller of a call option

2. Supply of put option is limited and buyers are more, whereas the supply of call options are ample and buyers are less

This scenario would occur if the market was expecting a higher probability of a correction than the probability of a rise.

These analysis are expiry specific and should be looked at in isolation.

Read more at https://www.moneycontrol.com/news/business/markets/what-does-implied-volatility-in-out-of-money-options-forecast-2656041.html

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