Query on Volatility

#1
I was checking bank nifty, perhaps you can see how the intraday chart looks. I don't know how should I attach the chart here.

At about 11 am, BANKNIFTY 27-Dec-2012 CE 12600 came down from 118.3 to 38.3
Bank Nifty at the same time triggered from 12434.45 to 12211.8.

1) Was this change in the call option purely based on bank nifty alone or is it so that market increases / decreases the volatility before /after major events like CRR decision to adjust the price of derivatives ?

2) Is individual stock based volatility measured individually as index volatility?

3) Can you please suggest me any nse link where we can find chart (intraday & more) of such index/stock volatility.

4) Usually for Nifty, Can you give me any number or range that is counted as low volatility on consensus basis and something that is counted as high volatility.

5) Any clue on what is VIX? and how different is it from volatility ?

6) Is it so that we should look to purchase options when volatility is low and vice versa?

Thanks.
 
#2
You ask so many questions,let me have a crack :).

1.The change in call option prices was because of many factors:

i)Change in the underlying,i.e.,Bank Nifty moves the option prices move too.

ii)Volatility determines the ferocity of the move,the faster the Bank Nifty falls the faster the call option prices fall.

iii)Time left until expiry,the more the time left the more the option would be worth and vice versa.

iv)When major events are about to take place,option premiums are usually higher in anticipation and option prices tend to have an event premium attached to them.

Investopedia - Understanding Option Pricing.

2.Stock price volatility and index volatility are not the same.

Go to this link for Option Chain (Equity Derivatives) and enter the Stock Symbol and click on the strike price,the column you see as IV is the volatility.

3.INDIA VIX Chart.

4.As a broad outline,volatility below 20 is considered as low and above 40 is considered very high.

5.VIX is the volatility index based on the NIFTY Index Option prices.

6.When volatility is low option prices tend to be lower,think of it like the calm sea and when volatility is high so are the option prices.
 
Last edited:

Alchemist

Administrator
Staff member
#3
6.

A low PE stock is not always a good investment and a high PE stock is not always a bad investment.

Similarly, an option bought when volatility is low does not always lead to profits and an option bought when the volatility is high does not always lead to losses.

An option trader's ability to predict direction of markets and stocks is more important than the volatility in the market.

5.

VIX is an index of volatility.

http://www.nseindia.com/content/vix/India_VIX_comp_meth.pdf

4. and 3.

Market keeps changing its character with time.

See this long-term chart of VIX.

INDIA VIX Stock Price, NSE Market Indices, India VIX Price, Stock Performance & Comparison

A VIX level of 25 was consider low in 2008-2009.

The same level is considered high today.

Rather than using a VIX level, I suggest you just look at the chart of Nifty and decide whether the index is showing high volatility or low volatility.

2.

Volatility of indices and volatility of stocks are all measured separately.

Indices are made of stocks and thus volatility of indices is a function of the volatility of their constituent stocks.

1.

kris_mar has answered that.
 
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