21.04.2019
AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 6
IMPLIED VOLATILITY (IV)
Ø Volatility is calculated in a funny way – it is the annualized
standard deviation of the daily returns. we measure volatilities over a period
of one year (252d), but consider daily moves, so SQRT(252) = 15.9, you have to
divide HV or IV by 16 to get daily expected movement.
Ø IV plays big role on premium, must not be ignored. 36% iv goes to
24% when news cool down. So your premium falls by 33% even underlying stays
there. It's just news impact is absorb, so movement expected daily is back to
normal. In may case, despite directionally right, u lose.
Ø This losses are due to lost value of options if you're buyer. So
stock moves 2-3% as u expected but your CE/PE stays there or goes down, so it's
IV who makes buyer lose the money first and then Time Value, as u tend to stay
in long, after noticing stock moved in your direction.
Ø Next is to understand, how not to lose Theta Value or How can we buy
more time at low price? It's combination between expected move and expected
time. If stock hits the target value but not in time. You don't make profit or
very less profit compared to investment risk & fear.
Ø For e.g. If we're in first half of the month and target looks to be
achieved within a week, then slight OTM (2 strike away from. ATM ) option can
be bought with strict stoploss on Time Value and underlying movement both. If
underlying moves against u and hit Sl, exit option.
Ø If underlying moves towards target but not with time, exit with
small profit at time stop. Time stop = how many days I should hold bought
options, losing time value (theta). If target doesn't reach by that time,
waiting will erode small profit as well. So just exit.
for
more such type of education joint our online series and batches and be a pro
trader contact on 7028 421 786.
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