VantageTrade Wrap: Implied Volatility vs Historical Volatility

Analysis of Monday, Dec. 5 - Friday, Dec. 9

It was a crazy week on most of the indices world over. The volatility would have increased the heart beat of even the most seasoned traders/investors. The most striking part of the week gone by was that irrespective of what one’s view was (long/short) one could have still made money only if one had the conviction & courage to hold his position.

Index Options on Nifty as a trading instrument has been in vague for a long time, but off-late there is a lot of interest in these instruments as proved by the rising daily volumes on the exchange. As in any investment, in options also one’s entry point determines the pay-offs, there are various models to determine the deemed fair value of an option, which includes factors like time to expiration, historical volatility and strike price. Many options traders however rarely assess the fair value of an option before establishing position.

This behavior results from option trader’s perception that the option can explode in value if the underlying makes the intended move. This perception in most case makes the option trader to overlook the need for value analysis.

In most cases greed and haste prevents a trader from doing the value analysis, as a result for many option traders, the anticipated move on the price of underlying is already priced in the option price and the trader may find the option price to decline rather than increase when the anticipated price movement in the underlying happens. A look at both implied volatility and historical volatility will help the trader to take more informed price decision.

VantageTrade helps you to identify opportunistic trade in highly volatile markets. World markets are expected to go through a highly volatile period amidst micro and macro economic and political stand points, its advised to read between the lines and trade.