Implied Volatility ( Nifty options) help

Hello Fellow Traders,

Can some body help with the following queries:

1. How do you calculate daily IV of nifty options? I use the average of ATM Put/ Calls IV but its only an approximation...

2. I have come across several therads where members like AW10 Sir,Aditya14. SH10, Sir etc say current Nifty IV is high/low.Would be greatful if somebody could explain how to rate the current IV compared to historic IV.Can somebody provide a 24 month nifty daily IV data like they do for US stocks?

3. How correct is it to use VIX close data as a proxy for IV?

4. Finally many experienced traders i have met downplay the role of IV as theoritical rheoteric confined to the annals of PHD paperwork.They say that chart patterns are the best way to play options on nifty practically as IV can be low/hi but can remain there way beyond the option expiry.Can experienced traders share their views on this..

Will be immensely helpful..

From Jan 2010 till date VIX has been in the range from 17.05 to 32.13.

Im sorting it in 10 deciles and ranking the same from 1 to 10.Will this be correct way to categorize current IV by the decile and decide if its hi/lo?

Need opinion on this from seniors.Pls. help.

Found this on net called VIX 5% rule:

The proper way to use the VIX is to look at where it is today relative to its 10 day simple moving average. The higher it is above the 10 day moving average, the greater the likelihood the market is oversold and a rally is near. On the opposite side, the lower it is below the 10 day moving average, the more the market is overbought and likely to move sideways-to-down in the near future.


Do not buy stocks (or the market) anytime the VIX is 5% below its [10 day simple] moving average

But this is 4 stocks. Can the same be directly applied for options buying/selling?

Implied V is the perception of the participants as to what the market may do. Need not be right.
However it is basically used to identify cheap options.

Thanx 4 the reply.

Do u do the IV calculations urself or use the VIX as a proxy.Is it possible to get the historical IV charts for Nifty/ various stocks for atleast 2 years look back period

Most importantly can the VIX be used for individual stock options or only for Nifty options.

Regards,

Mukesh, I use VIX as proxy for IV. But you can also use standard option calculator to
get rough IV value by few trial error.
If you supply HV in option calculator, it will give u the fair price of option as of today.
But if you supply the mkt price of today and set HV field empty, some calculators will be able to fill HV field.. and that is what is the IV..

I don't use precise value of IV in my trading, but use it to judge the general sentiment.
So even if there is degree of error, then it doesn't bother much to me.

I don't think there is any place where u can find readymade historical IV charts.
But VIX data is available easily.

hope this helps.

This is one of the way to define a range to judge the relative position of current value. One could also calculate standard deviation of last x days and draw 1 std-dev / 1.5 std-dev / 2 std-dev band and asses the relative position of today's vix.

Lookback period, in my opinion, should depend on the trading timeframe that u are looking to cover. If you are trying to judge the picutre of next months option then 10day period is too short.. at the same time, if u use 3 months lookback period to assess volatility for next week, then again there is big mismatch.

In Indian mkt, stock options have very poor liquidity and hence their price is far away from fair value..So better not to attempt VIX / IV trading on them.
Otherwise, in liquid mkt, you should look at the VIX of the instrument that u are trading. In general, index have low volatility but stocks can have much higher volatility... and hence stock option will be priced higher to take care of extra risk /reward of higher volatility.

Hope this helps.