Measure volatility extremes with ease: Shubham Agarwal

 Measure volatility extremes with ease: Shubham Agarwal

Finding the correct volatility calculation is made easier when we are aware of IV (Implied Volatility).

As everyone knows, risk is a defining feature of stock markets. Since risk is a necessary component, it may also reveal a great deal about the expectations of traders. One volatility number may be used to quantify risk.

First, let's examine implied volatility. Thus, volatility is simply the rate of change of a stock or index, usually expressed as an annual percentage.

Beyond the topic at hand, volatility is a science unto itself. Instead, let's learn more about implied volatility. Implied volatility (IV), as the name implies, is a measure of volatility inferred from option premiums.

Five elements make up the option premium, which is information that is known via market quotations.

Share Price equals Accurate Information

Price of Strike = Acquired Knowledge

Interest Rate: Greater or Less Information Known

Time to Expiration = Acquired Knowledge

Calculated Figure (The Unknown) = Volatility.

Any amount of data may be used as the volatility input, however we can attempt to backcalculate the volatility number using the remaining four pieces of known information and Premium. This backcalculated volatility is known as implied volatility (implied by option premium). We can avoid the bother of finding the correct volatility calculation by knowing IV.

Now grasp the nature of the Relationship.

Any stock or index decline is harmful, whereas an increase is beneficial. According to the rule of nature, things break down more quickly than they are built. Hence, the rate of movement a.k.a. The autumn season will see rising volatility, while the rise will see dropping volatility.

As a result, the relationship between volatility and stocks/indices is often negative.

A crucial aspect of volatility is: Bound by Range

Even if a stock may rise from $10 to $100 to $1000 to $10,000, its volatility will always remain within that range. This is due to the most basic cause. Similar to a car's speedometer (or rate of movement), volatility is comparable to a stock's or index price's milage. Even with a very large milage, the speedometer will continue to move within the range.

How Can Negatively Related + Range Bound Volatility Be Monetized?

We may deduce that the top end of the volatility range typically corresponds with the bottom of the underlying stock or index based on all of the previously stated features. Although it is currently difficult to get volatility figures, several options analytics software provide implied volatility.

I've been able to pinpoint action points close to the immediate bottom rather effectively (almost 6-7 out of 10 times) by using the following approach.

Recall that IV (Implied Volatility) will move zigzag. Just try to track a new high in IV to see if you can identify a potential bottom. Due to range bound, it will provide a down tick and stop climbing. That's the place to be as soon as it does. We might attempt a bargain seeking defensive trade.

The concept is explained by the Nifty IV chart, which shows the option with the closest expiration and strike price to the future.