Asking about Implied Volatility

[NathanBoy]

Hi all,
I am a stock trader and new to options trading. I need your help on implied volatility (IV). I read Jay Kaeppel's "The option trader's guide to probability, volatility and timing." I understand that what is high for IBM maybe low for Coca Cola, ie IV 60% maybe high for IBM, but IV 60% is low for Cola Cola. He clearly state that we need to compare current IV with past few years IV. For example: if in the last two years, IV for IBM is range from 30 to 70, then current IV 60% is high. I know how to calculate current IV (yes, there is many IV calculator outthere). My problem is I cant find any software that can calculate past IV. For example at this moment I know current IV for IBM is 60% but I dont know this IV is high or not since I can't compare it with the past IV.

What software or how can I get/calculate IV for past years?

Many thanks,
NathanBoy.

 

[NathanBoy]

He also wrote article about this in http://www.crbtrader.com/trader/v07n05/v07n05a02.asp

This is a sample chart of implied volatility for the last 2 years:
http://www.crbtrader.com/trader/v07n05/images/btv7n5a2a.gif

Another question: is this a right way to decide wheather an options is overvalue or undervalue? Look like most people dont do this (compare current IV with last few years IV)... ?

Thanks

 

[srikanth_kandalam]

You have to be more precise about things. There are 2 things here
1. Historical Volatily ( called Statistical Volatility)- this is the volatility of the underlying asset over time. over time there is definite pattern.

This becomes important as an input to option pricing ( this is the theoretical price)

2. Implied volatily is different- it is the Volatility that current Option price ( market quote)suggests . You get that by tracking it back with option pricing model- ie you go reverse, you know the price and other paramets- what volatility does the option price sugges?
As the name suggest- it is " implied"


A lot of people here do not give a damn about these things and randomly buy options- but their days will be numbered. This is the fundamental thing you need to check before you buy or sell options. IF IV changes- the pricing will be dramatically affected with little or no movement in the stock.

Unfortunately IV or Historical figures have to be computed- as there is no reliable source.

It is simple you buy/sell at closer to theoretical price- as over time things change.

 

[NathanBoy]

Hi Srikanth Kandalam,
Many thanks for your kind reply. I know and understand about historical (statistical) volatility. I can compute them and program the formula using ATR or Bollinger Band in metastock. What I mean in this thread is looking at where implied volatility was before. This method compare current IV with where IV has been in the past.

In looking about this, I found this article last night: http://www.theoptionclub.com/implied_volatility.html

So know I know chartbender.com provide this service for $99/mo. I wonder is this method is not important (so there is no many service/software provide it), unknown (almost impposible, I found this method early in my options trading "carrer") or just not popular? Shouln't there is software that we just need to pay one time fee?

Suggestion and advise is needed.

Many thanks again

You have to be more precise about things. There are 2 things here
1. Historical Volatily ( called Statistical Volatility)- this is the volatility of the underlying asset over time. over time there is definite pattern.

This becomes important as an input to option pricing ( this is the theoretical price)

2. Implied volatily is different- it is the Volatility that current Option price ( market quote)suggests . You get that by tracking it back with option pricing model- ie you go reverse, you know the price and other paramets- what volatility does the option price sugges?
As the name suggest- it is " implied"


A lot of people here do not give a damn about these things and randomly buy options- but their days will be numbered. This is the fundamental thing you need to check before you buy or sell options. IF IV changes- the pricing will be dramatically affected with little or no movement in the stock.

Unfortunately IV or Historical figures have to be computed- as there is no reliable source.

It is simple you buy/sell at closer to theoretical price- as over time things change.

 

[srikanth_kandalam]

I have not found sources in India for dependable ( hopefuly real time) IV and Greeks ( mainly Delta- sometimes gamma). Yes the article you referred is on the money- but people confuse the volatility numbers on NSE website to be Implied vol- in fact that is historical vol. They do a funny thing- what they look at is the daily statiscal vol and annualize it. Sure you can get a 50 day historical vol by maintaining your own spread sheet- but that information should be public. Else it a big dis-service - and frankly if people trade without knowing all this- then results are notgoing to be pretty- which in turn turns away people from Trading options!

The major issue is market depth- we dont have a market maker system for options in India- so until such time we are better off trading liquid index options. But if you are careful- and do your own due dilligence- you could make a killing selling puts ( assuming you intend to buy the stock if you get exercised)- if done correctly this can make serious money.

 

[loosingstreak]

I have not found sources in India for dependable ( hopefuly real time) IV and Greeks ( mainly Delta- sometimes gamma). Yes the article you referred is on the money- but people confuse the volatility numbers on NSE website to be Implied vol- in fact that is historical vol. They do a funny thing- what they look at is the daily statiscal vol and annualize it. Sure you can get a 50 day historical vol by maintaining your own spread sheet- but that information should be public. Else it a big dis-service - and frankly if people trade without knowing all this- then results are notgoing to be pretty- which in turn turns away people from Trading options!

The major issue is market depth- we dont have a market maker system for options in India- so until such time we are better off trading liquid index options. But if you are careful- and do your own due dilligence- you could make a killing selling puts ( assuming you intend to buy the stock if you get exercised)- if done correctly this can make serious money.

As you have said that the IV can be computed and serious traders do take the trouble to do that. Even if there were a software to spoonfeed traders do you really think the ratio of winners to loosers is going to turn around dramatically. I don't think so. If that were the case American and european markets would have more winners than loosers (not possible is it )

We do not have a market maker system , i think because no one would be interested in being market maker, since a market maker would need someone to sell to , and given the current lot sizes which do not elicit any retail interest ( thats where the volumes are going to come from) my guess is he is going to be sitting around twiddling his thumbs.

By the way options are cash settled here, you don't have to buy/deliver stock if excercised.

Cheers guys , trade well.

 

[srikanth_kandalam]

Losing on options is a broad statement- people lose money on a lot of things. Options are a tool- how you use them is your prerogative.

To your point on "options are cash settled"- I find that incredible, if that is true- why the hell would you call that an OPTION?

Let me give you a scenario- if I wanted to buy a stock XYZ for long term holding- but I feel the price I will pay is about 100 bucks too much. What is wrong if sell a put option- if I get exercised. I get my stock- if I dont then I keep the premium. I intend to leave money in the account covering 100% of the stock purchase ( assuming exercise happens).

If you are absolutely sure- please respond. Appreciate if you can provide some dependable links!

 

[loosingstreak]

LOL.... Here you go . Reproduced from the nse site.

Settlement Mechanism
Options Contracts on Index or Individual Securities
Daily Premium Settlement

Premium settlement is cash settled and settlement style is premium style. The premium payable position and premium receivable positions are netted across all option contracts for each CM at the client level to determine the net premium payable or receivable amount, at the end of each day.

The CMs who have a premium payable position are required to pay the premium amount to NSCCL which is in turn passed on to the members who have a premium receivable position. This is known as daily premium settlement.

CMs are responsible to collect and settle for the premium amounts from the TMs and their clients clearing and settling through them.

The pay-in and pay-out of the premium settlement is on T+1 days ( T = Trade day). The premium payable amount and premium receivable amount are directly debited or credited to the CMs clearing bank account.


Interim Exercise Settlement for Options on Individual Securities

Interim exercise settlement for Option contracts on Individual Securities is effected for valid exercised option positions at in-the-money strike prices, at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in option contracts with the same series, on a random basis. The interim exercise settlement value is the difference between the strike price and the settlement price of the relevant option contract.

Exercise settlement value is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= exercise date ).


Final Exercise Settlement

Final Exercise settlement is effected for option positions at in-the-money strike prices existing at the close of trading hours, on the expiration day of an option contract. Long positions at in-the money strike prices are automatically assigned to short positions in option contracts with the same series, on a random basis.

For index options contracts, exercise style is European style, while for options contracts on individual securities, exercise style is American style. Final Exercise is Automatic on expiry of the option contracts.

Option contracts, which have been exercised, shall be assigned and allocated to Clearing Members at the client level.

Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the relevant Clearing Members with the respective Clearing Bank.

Final settlement loss/ profit amount for option contracts on Index is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).

Final settlement loss/ profit amount for option contracts on Individual Securities is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).

Open positions, in option contracts, cease to exist after their expiration day.



The pay-in / pay-out of funds for a CM on a day is the net amount across settlements and all TMs/ clients, in F&O Segment.