Why implied volatility increase or decrease in options?

Why implied volatility increase or decrease in options?

Stock futures September 02, 2019

Why implied volatility increase or decrease in options?



Why implied volatility increase or decrease in options

  1. Implied volatility increases or decreases due to the sudden increase or decrease in the demand and supply of Call or put option.
  2. If the out of the money put option implied volatility is more than the out of the money call option, implied volatility increased in the put side.
  3. If the out of the money call option implied volatility is more than the out of the money put option, implied volatility increases in the call side.
  4. Implied volatility also has its range called lower range and upper range
  5. When the implied volatility is at the lower range it is advisable to buy the options
  6. When the implied volatility is at upper range it is advisable to sell the options
  7. Professional traders trade on both sides
  8. When implied volatility at the lower range Professional traders buy options 
  9. When implied volatility at the upper range Professional traders sell the options 
  10. They always trade with the trend of the market 
  11. If the stock market in a downtrend - implied volatility is high they prefer to sell call options
  12. If the stock market in a downtrend - implied volatility is low they prefer to buy put options
  13. If the stock market in an uptrend - implied volatility is high they prefer to sell put options
  14. If the stock market in an uptrend - implied volatility is low they prefer to buy call options
  15. Always remember that option sellers are more intelligent than options buyers they only sell when they get high premium
  16. Option sellers take an unlimited risk and it takes large sums of money to sell option
  17. When the demand for options increases implied volatility increases
  18. When the demand for options decreases  implied volatility decreases
  19. Therefore when the implied volatility of call option is more than put it suggests that professional traders are selling the call options.
  20. If professional traders are selling call option it suggests us that the market will face resistance at that level.
  21. When the implied volatility of put option is more than call options it suggests that professional traders are selling the put options.
  22. If option sellers are selling put option it suggests that the market will take support at that level.
  23. Higher the implied volatility - higher the premium - higher the premium - higher the profit for the option seller.

Other reasons for the increase in the put option implied volatility

  1. When professional traders hedge their positions they usually sell put options, therefore, the demand for a put option is more as compared to calls in bullish stock.
  2. When there is uncertainty in the market the demand for put options increase which causes an increase in implied volatility.
Learn Harmonic pattern cheat sheet for the stock market - Part 3
Learn Harmonic patterns cheat sheet for the stock market - Part 1
Learn Nifty 50 - Why Option Chain Analysis fails?
Calculate Option Chain Probability - Implied Volatility Excel Sheet




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11 Comments

  1. AsimSeptember 10, 2019 at 2:32 PM

    THANKS FOR VALUABLE INFORMATION.

    TO CHECK THE IMPLIED VOLATILITY IS INCREASED OR DECREASED SHOULD WE TAKE THE OUT OF MONEY CONTRACTS HAVING HIGHEST OPEN INTREST.

    SECOND DOUBT:

    I HAVE OBSERVED IN MOST OF THE STOCKS IV IS ALWAYS HIGH FOR OTM CONTRACTS FOR PUT IV THAN THE CALL IV IRRESPECTIVE OF WHETHER THE STOCK IS IN BEARISH OR BULLISH MODE.

    HOW TO JUDGE IF professional traders are buying stocks JUST BASED ON LOOKING PUT IV.

    ReplyDelete
    Replies
    1. Stock futuresSeptember 10, 2019 at 4:01 PM

      Yes note the change in implied volatility of highest open intrest.
      Second . please provide stock name so that we can explain to you.

      Delete
  2. AsimSeptember 11, 2019 at 1:08 AM

    Appreciate your prompt response.

    As of today in L&T Option chain seems to be bullish with put strike at 1300 pe (highest OI) IS HAVING IV AS 25.26 AND STRIKE OF 1400 CE HAVING IV AS 22.06 WHICH IS LESS THAN PE IV.

    Secondly tcs is looking bearish with oi (high open intrest) at 2100 pe having IV as 23.17 wheres as on call side 2300 (high oi) iv is 21.10 which is also less than put iv.

    Now let me know with respect to your second point where you have mentioned "If the out of the money put option implied volatility is more than the out of the money call option, implied volatility increased in the put side.

    I just want to know if i want to invest in a stock for very short term (eg 15-30 days) based on Implied how should I know that IV is increasing on particular strike and from which source.

    Do not that IV is seen in option chain for that day only. there is no record of IV for each and every stock how will know if IV is increasing or not.

    ReplyDelete
    Replies
    1. Stock futuresSeptember 11, 2019 at 8:06 AM

      Asim Implied volatility is only one aspect of analysis. Check my new blog on stock breakout. Do your analysis on 1. fibonacci retracemennt 2. trend line 3. price-volume spread - option chain analysis - RSI divergence or OVB divergence - after doint these analysis then made your decision. Check our new blog about brokerage industry truth.

      Delete
  3. ROHITOctober 4, 2019 at 9:33 AM

    How to find long position with help of implied volatility in options chain

    ReplyDelete
  4. UnknownOctober 5, 2019 at 6:16 PM

    how we conclude the market direction with the help of implied volatility ??????????

    ReplyDelete
    Replies
    1. Stock futuresOctober 5, 2019 at 7:32 PM

      usually if call side implied volatility is greater than put side market move down also if put side implied volatility is grater than call side market move up. This is the standard rule but you need to record the implied volatility data and find percentage change in implied volatility. With high implied volatility market trade in a range becuase call sellers and put sellers are professional traders they eat all the premium and retail traders are buying the call and put options at high premium because implied volatility is high which decrease fast with time. If implied volatility is low professional traders are buying the call and put options and retail traders are selling the call and put options. Professional traders buys the low price call options and earn big profits with sudden move in index vice versa retail traders lose big . Hope this will clear your some doubt if you have any other questions write us back.

      Delete
  5. Star traderApril 5, 2020 at 10:12 AM

    For any conclusion we need to record data atleast for 5 days.?.
    For AVG premium decay ,and Avg increase or decrease in OTM iv on both side.
    Sir m doing correct?

    ReplyDelete
    Replies
    1. Stock futuresApril 5, 2020 at 9:14 PM

      Yes the data is important.For back testing collect at least 3 month data.So the point to find average decay is not the answer. The real answer is when will implied volatility will increase or decrease.Please read this blog some other data points for analysis of future and options https://stockfuturesnse.blogspot.com/2020/04/stock-future-options-derivatives.html

      Delete
  6. HarishApril 21, 2020 at 10:44 PM

    Thanks for sharing this. I've one doubt regarding point 11.
    "When the implied volatility of put option is more than call options it suggests that professional traders are selling the put options."
    My question is how incresed IV in put referes to put selling by professional traders?

    ReplyDelete
  7. UnknownJuly 14, 2020 at 12:27 PM

    I have one doubt

    Suppose in Nifty Put COI is totally crashed and Put premium is high but the Put IV suddenly increasing in this case can we conclude that the big players are started selling Put..
    I need your suggestion

    ReplyDelete

Thank you for your valuable comment