#Options Trading में Implied #Volatility क्या होता है ? | Options #Trading - 4 | #Learn2Trade 36
Welcoming you all to the session #36 of learn to trade and #4 of options trading I’m Vivek Bajaj and I’m teaching trading & options to Annapurna Ji. Hello. -Hello Sir. -How are you? -Good Sir. -Fantastic. So, Annapurna, our journey of options has started, 3 classes have been done This is the 4th. And in the last class I had taught you about Greeks. -Right Sir. Then, at night the Greeks are roaming in the mind? Sir, it’s too confusing. I’m trying to get comfortable with it.
If you have to work in Options, then you have to be friends with Greek. -Okay sir. I had told you before even, when we had started L2T, that friendship is most important. And when you be friend with limited people, its quite fulfilling. Not like Facebook & Instagram Friends.
Then Greeks should be your friend, who would help in life’s up’s & down’s and will guide you. If you are doing options trading without Greeks then it’s like tossing a coin, Dependent upon God. The one who is dependent upon God in share market has no God too. Greeks are important. So, in today’s session let’s talk more about Greeks. I want to make you 100% confident about it. And, I have told you the first level Greeks only. Greeks have Greeks too which is 2nd level derivatives. Don’t have to go till there only because that is being used by highly sophisticated traders.
So, now at this stage if we focus on the first level of Greek’s it is sufficient. So, let’s go back to Opstra which I had told you an amazing product made for Options. If you want conceptual & learning understanding of Greeks, then you go to Elearnoptions. And there we have created learning content for Greeks in English. So, who wants to learn conceptually about Greeks in English, then they can go here. Can’t practise. As it’s made free, So, only basics are done here. But Opstra people have done it nicely.
Let’s use their utility. Option chain was our class #2 & #3 was Greeks. Now let’s mix both and take a view. Under Open Interest, there is Option Chain. This looks so similar to the one we had seen on NSE’s website. This side CALL and this side PUT. But columns are more. What are they? OIC, OI Vol. was there too.
ITM Prob., IV, LTP & change. If I change it to Greek’s view then I get the Greeks and It’s free. For this they have kept it free for us. Let’s go to Nifty, and see the expiry of 26th August. Why so? -Because last Thursday. -And it’s the monthly expiry. Whenever you think to work, think about monthly expiry, avoid weekly expiry game.
When there will be more confident then, you can go for it but I don’t like weekly thing. My opinion would be monthly. Going to NIFTY of Monthly Options, this is Option Chain And at what strike price of call, what’s the OI, IV and in Options Greeks, lets zoom in.
If we see the Geek’s view, the NIFTY’s price is 16,250 which is “At the money” too. This is ‘at the money CALL & PUT’. You remember we talked about delta? Delta of AT THE MONEY is 51.93 meaning if NIFTY increases by 100, Then the premium of call would increase to 51.93. And in case of PUT -48. Why?
Because it has inverse relation with underlying. If that inc. then this will dec. IV of at the money is 11.11 of call and put’s 11.35 Before I had told, what is IV. Theta of at the money is -409. And theta of put is -418
What does this mean? If you leave the position for 1 lot for 1 day then you would get 409 and if you keep it then there will be expenses which is why Theta is in -ve. Because due to time decay, this much money is getting spent. Let’s talk about it sometime. Conceptually Theta is trying to say that if 12 days are remaining to expiry then the seller Has risk for 12 days only. And if 11days are remaining, the seller risk is for 11 only.
Time value of seller is an intrinsic value which is derived from underlying price – strike price If it’s in the money then the intrinsic value would be plus and when it’s out of money then intrinsic value is 0. Then the remaining is time value. For example, if we go to Option Chain and look at call option of 16500 Then its price is 70. But current market value is 16250, but call of 16500 is 70 then what is this 70? This is time value. Because it has no intrinsic value. This is not “In the money”, It’s “out of money” from point of view of Call But from the put point of view it’s “in the money” then its price is 305. 305-250 is intrinsic value. Approximately 50-55. Then the time value for both is more or less same.
Can’t be 100% same because behaviour of Call & Put is different. Both Time value would be different. Both of the seller’s have different expectations and character. The one selling put is of diff nature. and risk-taking appetite is different. And the one for call is different.
Generally, risk is defined from the view of market. Now, this call one has more risk of BOOM. So, its demanding more premium, time value. And the put seller is asking less premium As he is thinking market won’t fall, then less the premium would be fine. Time value of CALL & PUT of the same strike price speaks a lot about the seller’s expectations. If its time value is less, then little premium is fine for him too.
This means he isn’t expecting the market to grow which is why less premium is fine for him too. The whole equation of time value is measured very nicely by IV. Now let’s discuss about IV. What is volatility? -The change in price. -As simple as that. The more frequently it will happen, it will have 2 factors price & time. The one changing so frequently will have high volatility, suppose if price rises from here to here, But it takes 1 year and goes flat, then its volatility is less. There is a concept of historical volatility and IV.
historical volatility meaning if we see the data before today then what is the stock’s volatility character? Can reliance and acc be at same volatility? -Possible but generally no. Every stock has its own volatility characteristics because that depends how much share in market. Stock is in nifty or is a non-nifty stock and what type of investors are holding it. So, every stock has different character because every stock has different operator. Ever operator is different so every volatility has a different relevance. Historical Volatility is, the person doing option selling is looking at historical volatility because depending upon volatility he will decide option premium.
If its more volatile, then the options seller’s heartbeat will increase then it will ask more premium And if it would be less volatile stock, then the seller too has peace then he will work with less premium too. Sir, the option seller is getting premium, so the volatility should be beneficial for him. Suppose I am option seller and you are option buyer and you said you have to take call of 16250 You say, how much premium you would charge? Then I would say, Annapurna the market is not volatile. Standing there for many days, I don’t think so market will go anywhere, then let’s assume that I will give you in 55. In 55, take the call option of 16500. You said 55 is too much…what will I do for so much time value? Make it less to 50 Sir.
What I said? This is the market rate, if you want to work, work at 55. Now after few moments news came that some political problem Came. You might be knowing what happened in Bengal and if same happens in India, then there will be a huge problem.
Then due to that problem I felt that market could be very volatile, possible that it’s not there till now But could be volatile in the coming days. Then I would say it won’t be 55, now it’s 65. It was 55, and now it’s 65. And in recent times, so much changes happened due to which my heartbeat inc. I got scare and which is the reason I’m charging more premium.
Option seller’s fear is the most imp. Component in the option pricing. Depending upon the fear, premium is decided. Fear is IV. So, Historical Volatility is base which was evaluated by option seller creating it as a base. What I said is? Market is here only. IV not moving. Would give you in 55. Making an estimate from the historic volatility that 55 will do but as I started to feel that In Bengal this happened, if it happens all over India, then it would be a trouble. My fear raised because I’m option seller sitting in unlimited loss zone. So, my fear will decide the option premium value. So, I took it to 65.
So, IV is nothing but the heartbeat of the option seller. Now how to calculate this? Historical Volatility is done by last prices through standard deviation and all that, I’m not making you confused. You just think that, according to historical price movement, historical volatility is calculated. But that’s just a reference point. IV is heartbeat of seller and how can you measure it?
You will measure it through my fear by my price offers. There is something that you feared. If I have done 55 from 65, there is something that I feared. What the heartbeat is saying to the current price, is called IV. Many works have been done on Option pricing. It’s a probabilistic model.
There is one formula, Black Schole formula which was invented by scientists, then in that some variables were put. Such that for every strike price a fair value is calculated that this should be the premium and In that one of the variables Is historical volatility. Other is Time to Expiry, Strike price. All these options-oriented variable, interest rates that is decided by family logically that this should be the value with this formula But market isn’t a formula, it has emotions, it has anxiety, fear, greed. It is said to be fair. But does it happen? -No. -Market is never fair. Market is either undervalued or overvalued. It can never trade at a fair value. Then the premium calculated by Black Schole formula should be taken? No. Something more than it or less than it. Then that more/less is IV.
So historical volatility is the data which gets feeded into the black schole formulae… …to give you the fair value of options but that not be the right price traded in the market If we back calculate from the right price that is traded in market, then we would see it’s IV. So, this means there will be diff b/w historical volatility and implied volatility. Historical is what has happened, Implied is what is going to come! Whenever we talk about stock market, we talk futuristic and if history then look at the financials, book-value of the company.
Reliance’s book value is 1200, But stock price is 2100. Why? 900 more because there is an estimation made that in future this is going to happen. It is one type of volatility assessment. But estimating the future volatility earning.
In options why seller? Because he is the one taking risk. Let’s go to example of LIC, It’s taking risk, so if you got a habit of smoking and LIC got to know then will it charge the same premium? No. Because LIC will fear that he/she might go anytime. Some people will say life inc. because of that But LIC won’t agree. It’s not practically approved. So, volatility is always judged from the point of view of seller. Let’s go back to our option Greeks. Now you can understand the picture clearly. I don’t want to go into complex situations, doing that I will create fear for you but I want to keep it simple. That do friendship with everyone because what happened when we meet a friend and he says he scored this much in maths in class 10, 12 & graduation, gold-medallist and awards.
You then would say- you are here for friendship or ..... To have friendship with delta, IV you don’t have to go into their complexity. You have to understand their root what they want to say. They are very nice.
Looking at Theta, Option seller would say this much would come. What is a BT for options? While sleeping at night, money makes – for seller. And for buyer, even in sleep he is having losses. Which is called time value. Delta is depending on the value; my premium will be decided. Although this is 51.93, but never exact because as the market rises by 100 then that 16250
It becomes 16350, whose delta is 42.49. Then 51.93 became 42.49 This journey is not linear. If you will make the delta graph, I will show later on, if you will plot delta graphically then its line is not like this. It will have some slope; it will not have a linear straight line. So, I can’t say if it becomes 16270 from 16250 this much premium would inc.
No one can say this. It is not a linear line. In fact, its impact is even calculated on delta which is called Gama. Gama says that as delta cannot be linear, then Gama is delta’s slope. This you had read in school. Every line has a slope. In linear line slope is constant, but if its curvy the slope changes. Then you assume Gama as it’s slope. -Sir is this the 2nd order derivatives? It is. Because Gama is confused whether it’s first or second.
Some love them so much that it is first and some as second. But logically it’s second order. Because it’s measuring the delta. Delta’s slope. But how to use Gama, will teach you in simple language. Don’t get afraid which is why I haven’t talked about Gama here. This option series is not meant for advanced option strategies because my learners are not much advanced. They are basic like Annapurna. So, I want to make your base strong in Options that Later on, if someone teaching you advanced then you will know who is making fool.
Theta, Delta, understood IV? 11.11 is a number which is a heartbeat of the seller. What is the mathematical significance of 11.11? There is formula getting derived behind it. It is assumed that it is the heartbeat of the seller. 11.11 is the absolute volatility which is IV. So, historical volatility might be something and IV is in today’s date the heartbeat. Vega says that if it gets increased by 1% If 11.11 becomes 12.11, then this much money in premium would come.
If someone has taken, then this much money would get and someone has sold it then this much money would be used. This is basically kind of a second derivative of IV. So, theta, delta, Vega’s significance has been understood? Understood regarding IV? And you know the last traded price, strike price. Now you are ready. You have understood what is option chain, option Greeks. Now you are ready to make options Strategies. Option doesn’t mean I would buy in this strike price, then it would mean you are working for 1 purpose Or for delta or theta. If I say, let’s eat theta. Then what would you do? -Meaning?
This money of theta is generally used colloquial language in market So, that you get used to this language which a typical trader uses. Let’s eat theta. Meaning this 409 that I’m getting, lets eat that. How will you eat? By trading. What will you do? By selling. -You have to eat. You have to take Theta. - So, I want to take advantage of Theta that’s why I will sell. If you sell and the market fluctuates, then your delta will be loss. Delta will cause you loss. Your intention was to eat Theta but you didn’t think that if I sell Theta, then this delta would get angry from me. All 3 are friends and need to be focused on them together. No partiality can be done
If you have focused on one, then you will have to send chocolate for the second one, so that he doesn’t feel bad. When you have went to lunch with theta, and will put photo in Instagram, then delta, Vega will see Which is not good, then you have to take care of it. You have to give chocolate. So, whenever you are focussing on any one Greek, the other Greek has to be Hedged. How will you hedge? Hedge the delta and for eating theta you have sold call of 16250 It means you have taken risk, that price will inc. your money will be used.
So, if I want to hedge the inc. of price – then I would have to buy it. What is the point when I have to buy and sell the same? Will have to buy something else. Whom? Either strike price of above or below but when you buy it then it’s theta would even come. If I sell this and this, then the net impact of theta would become small.
Second is, that if I have to eat Theta and hedge delta, then I will buy share. How much share? 1 lot. Its lot is 50 shares. So, if lot size is 50 then buy for 25. Such that if price inc. then I get money in share and the impact of delta here neglects there. And theta keeps on giving earning for every day. So, whenever you are trading any Greek, first of all if you are trading in options. Then you have to decide first that for what I’m doing? Delta, Theta or Vega? If you didn’t like this, then don’t do Option Trading. Leave it. Why are you playing with yourselves?
If you cannot do this then you can’t earn In Options. So, Delta, Theta, Vega. I’m talking about simple 3. Not going into deep complications of it. Many people say that I don’t use Greeks, it has no relevance. Okay. It’s working for now but more you go advanced the better you will be. There is no harm
So, decide what you want to play? Theta, Delta or Vega. Playing for market’s fluctuations, Or for eating theta or for playing volatility. Many a times people say that I feel volatility will inc. Because in some stock news or results is going to come, then that time volatility inc. So, you want to take Vega. If you take Vega, then suppose you have to buy this. Buy IV. Because you think 11.11 will become 13. Then, how will you buy Vega?
Obviously, you would have to buy premium of strike price. But then you would have to hedge delta and theta too. But you have taken Vega, Theta and Delta become upset. Then if you have to hedge Theta, You have to take Vega and sell Vega of some other strike price such that you can perform Vega properly. This thought process is oriented towards strategy. So, what people do?
Depending upon the objective of trade, they define strategies. It could be single-legged Two-legged strategy, Three-legged strategy. Taking 1 and selling 2, Taking 1and selling 3 Taking this expiry and selling next, taking next expiry and selling next.
So, basically the premium difference in 2 diff instruments that is because Either volatility being different or theta impact could be different. Or delta could be diff. I am not taking into advanced because then you have to study in advanced options And there is a book that I will say, if you are interested in options then, Options as a Strategy Investment. A very nice book through which I did my Options journey. Very fat book. Very nice book. The one wanting to go into advanced options can look that. But in this series as we have learnt to trade in cash market, then how my position in cash market through options can be more effectively managed and generate extra return. We will discuss about this. One question sir, Vega, Theta, Delta is saying changes. Right? Change by 50, 409.
These are absolute values. Right? Then this is the change in premium? -Yes. But all the three are giving different data. Then how is actual premium change measured? Whenever we will run a strategy, in that strategy we will see that due to that strategy what is the actual impact in premium. We will discuss about it in the next session when we talk about strategy discussion. -Okay. So, this was options class #4. A little long. But I hope you understood that
Greek’s concept is complicated but I’m trying to making it so simple If you aren’t using Greeks for trading and trading in options there is no harm in keeping this knowledge at the back of your mind. It will be a value addition only. It won’t be a loss. So, I hope you like this video and if you liked it then like the video and share with people. If I am nice, Annapurna’s learning is nice, then share this channel and tell people trading is not tough if done nicely.
It’s a good thing to do for full time as well as for parttime. Thank you, friends. See you on the next video of Options Strategies. Bye-Bye.