Studying Price and Implied Volatility relationship for Options - PNB

[raj_hpking]

Hi All,

I am studying Price and IV relationship. I am studying PNB and trying to compare price with its IV. I read that, whenever price is high, IV will be low and vice versa.
General Trading setup:

• If Price is high and IV is low then CE and PE will be cheap. In such scenario buy PUT.
• If Price is low and IV is high then CE and PE will be expensive. In such scenario sell PUT.

What my understanding is, price and IV increase in opposite direction i.e. if price increase then IV decrease and if price decrease then IV increase. But what I found is in attached scenario for PNB, whenever price is increasing, IV is also increasing and vice-versa.
Example: Oct-17, Jan-18, etc...

How is this possible? Is any of my above understanding or strategy wrong? Please help me to understand.

 

[SarangSood]

Hi All,

I am studying Price and IV relationship. I am studying PNB and trying to compare price with its IV. I read that, whenever price is high, IV will be low and vice versa.
General Trading setup:

• If Price is high and IV is low then CE and PE will be cheap. In such scenario buy PUT.
• If Price is low and IV is high then CE and PE will be expensive. In such scenario sell PUT.

What my understanding is, price and IV increase in opposite direction i.e. if price increase then IV decrease and if price decrease then IV increase. But what I found is in attached scenario for PNB, whenever price is increasing, IV is also increasing and vice-versa.
Example: Oct-17, Jan-18, etc...

How is this possible? Is any of my above understanding or strategy wrong? Please help me to understand.

View attachment 26424

Your understanding is half right. Price is inversely proportional to IV. But price of the underlying stock or index is not the only contributor to IV. The prices of ce&pe also matter. So in the case where PNB increased and IV also increased the prices of ce&pe (straddle) also went up.

 

[raj_hpking]

Your understanding is half right. Price is inversely proportional to IV. But price of the underlying stock or index is not the only contributor to IV. The prices of ce&pe also matter. So in the case where PNB increased and IV also increased the prices of ce&pe (straddle) also went up.

Thanks Sarang.

But any specific reason that IV (ATM) for PNB is always more than 50? Why it is so high even there is not much price volatility?

Also, what should be the approach when price is high and IV is also high and price is low and IV is also low?

 

[SarangSood]

Your understanding is half right. Price is inversely proportional to IV. But price of the underlying stock or index is not the only contributor to IV. The prices of ce&pe also matter. So in the case where PNB increased and IV also increased the prices of ce&pe (straddle) also went up.

Thanks Sarang.

But any specific reason that IV (ATM) for PNB is always more than 50? Why it is so high even there is not much price volatility?

Also, what should be the approach when price is high and IV is also high and price is low and IV is also low?

PNB wouldn't be the right choice to track through greeks because of low liquidity in options. So the prices of the options can give wrong indications.

About the approach it is not advisable to trade with a fixed mindset that if for eg IV is up and Prices are down so and so strategy will work and not the other.

I personally am an option writer in nifty and banknifty. And there are a wide range of scenarios where i get in or get out daily. In many cases i write when the IV is very low and in other cases when IV is very high. This all i able to achieve through experience backed by good profit in the strategy. Also IV is not a full proof indicator to tell if there is volatility or not. Sometimes a big movement is just around the corner when the IV is very low.

 

[smeaglegolum]

There are some misconceptions here. IV is usually considered as an indicator of fear in the market. But usually that is not the case always. There will be cases where IV will be high even when stock is going up.

For eg, there is a FDA approval for a drug of a Pharma company. This is a bullish scenario. People will rush to buy the call options to take advantage of likely bullish movement of the underlying stock. Here IV will be very high because calls are expensive as there is more demand for them.

And the case will be the opposite if it were a FDA ban or negative review of an pharma inspection facility etc.

 

[trendtrade]

Thanks for sharing your insights friends. I completely agree.

 

[SarangSood]

There are some misconceptions here. IV is usually considered as an indicator of fear in the market. But usually that is not the case always. There will be cases where IV will be high even when stock is going up.

For eg, there is a FDA approval for a drug of a Pharma company. This is a bullish scenario. People will rush to buy the call options to take advantage of likely bullish movement of the underlying stock. Here IV will be very high because calls are expensive as there is more demand for them.

And the case will be the opposite if it were a FDA ban or negative review of an pharma inspection facility etc.

Actually in the above (FDA bullish news) example traders can sell puts also which can lead to decrease in IV. So IMO IV's should be followed by comparing both ce and put together like in a strangle. So if the strangle goes down so will the IV of the stock or index as a whole. That's what i tried to explain in my above comments.