Mohan ji, I just wanted to say, that if we have to quote some IV value for DLF and UNITECH etc. then how could we possible state that IV Value, because neither the stock, nor the futures contract have any IV Value, and only the Individual Call and Put Contracts of these realty sector stocks have got their separate IV values.
So is there any accepted and sensible method, by which one could assign a single IV Value to DLF and Unitech and all such stocks of a given sector ?
I have seen online on a few sites like Myfno etc. that they assign single IV Value to DLF and all other counters. I am trying to figure out, how do they do it, and if that is the correct way to do it.
To make it even simpler, suppose I ask you this directly, that ok sir, tell me the IV of DLF at todays market close time. Then what would be your answer for this, and how exactly would you calculate this IV of DLF, as a whole ?
I hope I have clarified my question. Once again, thank you so much for sharing your insights.
Best Regards
Yes sir, you got it correct to all extent.
Now, a kind request, to all participants in this thread. Just because mohan sir has used a word "Rubbish" doesn't mean that he has disrespect torwards some particular member or concept. We should take his replies in the right spirit.
IV is very important concept for any option trader and mostly we do not pay attention to the details and just blindly believe whatever we see on the internet. So if some experienced traders are discussing about IV here in this thread, in an open minded manner, without getting egoistic about it, then that would be very beneficial for all the community members here. So dear friends, please let the discussion go on in the right direction.
Thanks and best regards
Before going to your question, let us understand what is IV in simple language. Please give time and read it thrice and understand the concept. Once you understand this logically, your perspective will change and you will get your answer.
What is IV in option price ?
Black & Scholes is widely used pricing model for calculating Theoretical Option prices.
Call and put options pricing is dependent and
DERIVED based on following factors –
1) Price of the underlying
2) Strike price
3) Risk free rate of interest
4) Time to expiry
5) Volatility
Out of above five factors, first four are factual in nature. We already know the price of the underlying, strike price, risk free rate of interest, and time to expiry. These four factors are fixed. What we don't know is the last one -
volatility.
Example: Lets say Nifty is at 11900 level on June 15th & 12000 CE is trading at Rs.100
What is this Rs.100 ? This 100 premium is derived from the above mentioned 5 factors.
To Simplify, Rs.100 is derived based on:
1) 11900 (Price of the underlying)
2) 12000 (Strike price)
3) 6.5% ( as reference )
4) 15 days ( 15 days to expiry )
5) ???
Now the 5th factor which will influence the option price is the Expected volatality, which we call as Implied Volatality ( IV )
If we give the above 5 factor values in a Option calculator, it will give the Fair price or Theoretical option value.
If we give the first 4 factor values and Actual Option price ( 100 rs) , it will give the IV value.
Theoretical value will never match the actual market option price. WHY ? Because we cant determine the 5th factor - Expected Volt.
This IV is market driven.
IV = Part of Option Premium,quoted based on expected volatality.
Lets say in our above example @ Rs.100 premium the IV of this option is 12. And after 30 minutes, Nifty is at same level and option price increased to 102 . What will be the value of IV ? Since the rest of 4 factors remains constant - IV will become 13 or anywhere above 12.
In theory, you will see in many writings, that High IV = High price and Low IV = Low Price. This is wrong way of explaining. Actually it is:
High price= High IV and Low Price = Low IV. IV is a resultant of price change in this case. IV is a integral part of Option premium and it keeps changing due to changes in Price, Strike and Time to expiry. That is why every Strike will have a different IV.
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1) Is there any accepted and sensible method, by which one could assign a single IV Value to DLF and Unitech and all such stocks of a given secto
Conceptually this question is wrong. IV is just related to Option price. It has nothing to do with Price of DLF stock in cash market.
Example: DLF in cash market is at Rs.200 and 200 strike call is at 5 rupees with IV of 15. Now you just go on buying 100 lots of 200 strike call in market price...
What will happen is - Price of 200 strike call will shoot up and IV of 200 strike call will shoot up.
Will the price and IV of 220 strike shoot up - NO
If you just buy any illiquid option in market at high price , its iv will shoot up. It Does not mean that volatality will come in Underlying stock.
2) I have seen online on a few sites like Myfno etc. that they assign single IV Value to DLF and all other counters.
You are right. Some websites are quoting IV of Stocks.
How- They are taking average IV of Liquid ATM strikes and publishing them as IV of stock which is completely wrong method.
Just because something is given in a text book or a website, there is no need to trust it. Especially in this market & derivatives
analysis you will come across many sources who will spread these bookish and untested methods.
There intention may not be wrong, but the problem is they just spread untested methods without logic.
Take time, understand concepts, and continue your analysis.
Your study wmay work or fail, But if you test conceptually wrong methods, its complete waste of time.
