Everything you need to know about Volatility Trading | Options Trading
A price chart is probably the most important tool for traders. This blog will analyze the price behavior in the chart below.
This chart shows the hourly movement of an option contract price. What's most fascinating about such charts is the rapid swings between highs and lows.
Hedge funds and options traders love price movements that occur quickly. Also known as volatility, It's similar to trying to predict mood swings from looking at a chart showing the highs and lows of someone. Options traders and hedge funds are able to make money when things are changing.
Even if your trading experience is short, you probably know a lot about these terms.
High volatility is similar to dating, in that you don't know what you're getting. Higher volatility can mean that there is more uncertainty and risk and that the security's price could change dramatically in a short time. This can be either good or bad depending on your perspective. If things go well, you can make a lot of cash. You could also lose everything very quickly. You can see the difference between a lower volatility and a positive thing.
Formula for volatility
vol = sT where: Volatility (v), is the measure of how often a security's price fluctuates over time, such as a stock or bond. The standard deviation (s), is an indicator of the variance in return on investment from its average.
The T-term (or period) is the time span over which the security's value is determined.
What is India VIX?
In simple terms, volatility is the rapid movement of the price.
Higher volatility can mean that there is more uncertainty and risk and that the security's price could change dramatically in a short time. A lower volatility on the other hand means that the security is more stable and doesn't fluctuate nearly as often.
What causes volatility?
1. Market movement can be caused by many factors, which are outlined below.
2. Economic and political factors
3. Performance of the industry and sector
4. Company performance
India VIX is the India Volatility Index. It is a measure of the volatility traders anticipate for the next 30 days in the NSE Index. It is simply a calculation of the price swings investors anticipate in the market, rather than important market news. Investors are more likely to invest if the index's value is low. This indicates that there is no fear factor in the market. A higher index value indicates rising uncertainty.
India VIX takes into account five variables when calculating the strike price, market price, expiry date and risk free returns. VIX measures investor volatility by taking into consideration the best ask and bid quotes.
India VIX's importance can be seen in its relationship to NIFTY and market volatility. It has been shown that India VIX rises when market volatility is high, and vice versa. India VIX also has a
strong negative correlation to NIFTY. This means that the Nifty rises when India VIX falls and vice versa.
Difference between historical volatility and implied volatility
Let's first look at historical volatility, then we will move on to understand implied volatility.
What is Historical Volatility?
Historical volatility measures how much a stock has changed over time. Historical volatility, as the name implies, measures a stock’s price relative to its average or median.
Stocks with greater volatility are more risky because they have a higher chance of falling significantly in price.
It can be more lucrative, however, as there is a chance that the stock's value will go up. Stocks are more volatile when there is uncertainty.
What is Implied Volatility?
Implied volatility, however, is a look at how the market prices a security in future and can help traders forecast price movements.
Options contracts with higher premiums are usually available for stocks with higher implied volatility.
What is IVR?
IVR shows us the IV level at the moment compared to the 52 previous weeks. The stock's implied volatility rank (IV rank) compares its current IV to its IV range for a specific time period (typically one-year).
The IV rank allows us to categorize options from different securities with different risk profiles and volatility profiles. IV rank ranks the current IV level relative the highs and lows of implied volatility for the trailing 52 week period.
IVR can be rated from 0 100. 0 is the lowest IV% print for the current year and 100 the highest IV%.
Formula: IVR = Current Low (IV), / H L (IV).
Understanding how Implied Volatility rank (IVR), works can help you understand the stock market as a whole. A comprehensive understanding of Implied volatility will help you to better assess risks and build a risk averse portfolio. To learn more about options and futures trading, please visit the Implied Volatility article.
What is IVP?
The IVP indicates how much of the previous IV was lower than the current IV. It's also a number that can vary between 0 to 100.
The Percentile lets us compare stocks with different volatilities. This makes it an excellent indicator for market scanning. The IV percentile is more predictable than the underlying movement. The IV percentile allows us to identify extreme cases and increases our advantage.
IVP = The number of days below IV trade/252
Let's say that a stock's IV ranking is high. A trader might then look at strategies to profit from the stock's implied volatility decreasing. A stock with a high IV rank means that its current IV is at or near the top of its range for the past year.
Option traders may look at strategies that make money from an increase of implied volatility if the stock's IV rank falls. A stock with a low IV rank means that its implied volatility has fallen to the bottom of its range in the last year.
Understanding how the Implied Volatility Percentile (IVP), works can help you make better investment decisions in stocks and other securities. You can create a portfolio that suits your goals and risk tolerance by understanding the risks involved. This article explains more about implied volatility. LearnApp offers information about futures and options trading.