Question about IV

[Seneca60BC]

Hi

When we have a rebound in the market, will that mean Implied Volatility will fall? Or will a rebound of some significant magnitude increase or contribute to IV ?

Thanks

 

[chops_a_must]

Hi

When we have a rebound in the market, will that mean Implied Volatility will fall? Or will a rebound of some significant magnitude increase or contribute to IV ?

Thanks

I'm a novice myself, but I would imagine the IV of the calls would rise, and puts fall, and the overall rate to be determined by the volatility of overall moves.

But hey... I'm only a bit ahead of you...

 

[Seneca60BC]

LOL - thanks Chops - but I think your waaaaaay ahead of me - someone no doubt will answer us later!

cheers!

 

[jackson8]

http://sigmaoptions.blogspot.com/2008/05/more-on-volatility.html

http://sigmaoptions.blogspot.com/2008/05/more-on-volatility.html


not sure if have posted this link properly
may help to answer your question on volatility

 

[cuttlefish]

As I understand it, IV is exactly what it says - implied volatility. It will be low if people don't expect volatility and high if people do. Thus if the market rebounds and resumes a steady uptrend IV's will fall (on both puts and calls). If the market falls or rebounds dramatically and continues to jump around then IV's on both put and call options rises. This is why volatility is tradeable in its own right without needing to trade delta.

 

[jackson8]

As I understand it, IV is exactly what it says - implied volatility. It will be low if people don't expect volatility and high if people do. Thus if the market rebounds and resumes a steady uptrend IV's will fall (on both puts and calls). If the market falls or rebounds dramatically and continues to jump around then IV's on both put and call options rises. This is why volatility is tradeable in its own right without needing to trade delta.

are you saying that it is partially dictated by sentiment or a projection of an historical volatility trend into the future . maybe a bit of both

 

[mazzatelli1000]

are you saying that it is partially dictated by sentiment or a projection of an historical volatility trend into the future . maybe a bit of both

One may take into account historical volatility trend to forecast implied volatility.

As i understand it, Cuttlefish is on the ball, that it is the market pricing what volatility levels are expected in future and the market has come to this conclusion through consideration of a variety of factors e.g. sentiment, news anticipated, historical volatility and principles of serial correlation and mean reversion etc

Uncertainty usually increases volatility whether it is calls or puts.

 

[sails]

Here is a snapshot of BHP's IV in the top chart and price chart below for the last twelve months.

Normally IV drops off as the prices rise and usually increases on down moves. However, as you can see from around 14th March to 17th May, IV initially dropped off on the upside move, and then started to climb as prices continued to rise very strongly.

Supply and demand also contributes to IV levels...

 

[mazzatelli1000]

Supply and demand also contributes to IV levels...

Possible scenarios could be:

If the market tanks, and people are climbing over each other to buy puts, those selling puts will jack up the premium due to demand and also to give themselves more protection..

Also if there is an increase in speculative activity with demand for calls increasing, those selling calls will jack up the premium here as well....

Sometimes watching the volatility smiles can convey this....

Since underlying price, interest rates, strike price and time to expiration variables are known, the increases in premium will be translated to the volatility figure when working backwards through whichever theoretical model used.

 

[jackson8]

bhp
intraday trading range has increased over last few weeks. and if you look at a weekly chart the range has increased as well over same period. rather than direction of movement would these variations have more of an effect on the iv

have tried to include chart but not quit sure how to attach

 

[alphaman]

sails, what's Iress' approach to IV? Do they volume average the IVs of all traded BHP options, or just use the ATM ones?

 

[jackson8]

here is the weekly chart
last seven weeks of trading have seen increase in trading range wich seems reflect rise in iv

 

[Grinder]

Think it has been clarified above already but I see it as HV being real vol of the underlying over the last 20 days or so days and IV being what the market is predicting the vol to be in the future. IV will tend to trend the same as HV but many a time the market will get it wrong. Like to use it as a rough guide.

 

[sails]

sails, what's Iress' approach to IV? Do they volume average the IVs of all traded BHP options, or just use the ATM ones?

Alphaman, if you have WebIress, they have their various calculations found in Help->Database Codes->Option Stocks -> Implied volatilities. I would post it, but not sure if it's OK for public distribution

It's not really clear which one they use for the chart I posted - and they are all based on various averages. I really only use these charts to help give a visual guide to IV extremes, support & resistance, etc and to give an idea of the IV fluctuations we can expect. I accept that it is based on averages and is a rough guide only.

BTW, Iress has since updated the IV figures for today, and the IV spiked up further to 61.2% which is not reflected on the chart I posted earlier. This is an average of about 11% in two days.

According to the Iress option calculator, some of BHP OTM puts and ITM calls were trading around 85-90% IV which is certainly well above today's average.

 

[cutz]

An interesting example of extreme IV is that of MQG, peaking out at IV 303 on the 18Sep at the same time its price gapped down a huge amount, if I had the know how I would have posted up the charts, pretty impressive to look at.

 

[sails]

An interesting example of extreme IV is that of MQG, peaking out at IV 303 on the 18Sep at the same time its price gapped down a huge amount, if I had the know how I would have posted up the charts, pretty impressive to look at.

This reminds me - sometimes you get these unrealistic, one day spikes like this which occasionally appear on Iress IV charts - possibly is a glitch in the calculations. Perhaps caused by some crazy option trades on the day - I don't know what does it.

I have sometimes contacted Iress (usually via my broker) when it is an IV chart I am watching closely. Usually the ridiculous IV spike is corrected to something more realistic.

Anyway, here is the MQGIV chart and IMO would be more realistic if the IV on the 18th Sep was somewhere around the 100-120 mark...

 

[cutz]

Maybe a couple of crazy protective put trades by the uninitiated.

 

[mazzatelli1000]

Maybe a couple of crazy protective put trades by the uninitiated.

shoosh cutz!!!

i dont want anyone to know

 

[cutz]

sorry

 

[cuttlefish]

It opened at $38.45 on the 17th and closed at $26.00 on the 18th sept. Thats quite an extraordinary move in the underlying price and so was a real spike in the volatility of the underlying.

I could see a lot of reasons why people might pay high IV's in that situation - anything from protecting profits on short positions to covering open long positions etc.