How Implied Volatility impact on index Options trade

General
1

If Implied Volatility is high or low then what is impact on Options trade
for eg. if Nifity sport price is 9617 and

  1. Nifty call option 9600 LTP IS 118.05 AND IV IS 4.75
  2. NIfty put option 9600 LTP IS 106.95 AND IV IS 13.61
    still we have full month to trade.
  3. assume if expiry is near then what is impact and why
  4. which level we have to trade and why
2

Premium = Intrinsic value + Time Value + IV Value.

At expiry if option ends in ITM then you will get Intrinsic Value. If it ends OTM you will not get anything. Time Value reduces daily . IV value fluctuates based on demand and supply.

3

thanks haribabu

  1. can you please inform at this level what kind of strategy we have to used and why with above level.
  2. i want to buy above call but iv 4.75 what does mean and
  3. if want put buy then this 9600 strike price is good ??
4

What ever you buy it should be based on direction of Market.

If you are less than one year in trading then it is better to avoid trading options.

Options trading is more complicated and need more capital and better tools. 90% Option buyers lose money.

If you are constantly making profits in Equities then think about Options. Till then try to maintain consistency .

Each stock and each strike have different IV it is difficult to follow it without good tools.

If you use these efforts to learn fundamentals that will be better than trading options.

5

Before applying IV, it is better to understand fr wht the Volatility is refered.
Generally,
High Volatility signifies greater price movement on any direction, Upside or Downside. High Volatility breeds taking Less Risk, becos if price movment happen against ur position, the price value gets eroded quickly & more. Just think frm the point of view of handling big money.

Low Volatility signifies lesser price movement on any direction, Upside or Downside. Low volatility breeds taking More Risk, becos if price movement happen against ur position, the price value gets eroded not quickly & lesser.

From the Big Money management point of view,
High Volatility -> Taking Less Risk to own -> Neutral to Selling mode.
Low Volatility -> Taking More Risk to own -> Buying mode.

Coming on to Implied Volatility, it signifies Volatility at any point of time, for the next 30days ONLY(expiry month).

Now applying this to Options, taking ur strikes as example,
9600Call has less IV in comparision, meaning Low Volatility, signifying No quick price erosions, thereby leading to Buying.
9600Put has more IV in comparision, meaning High Volatility, signifying a quick price erosions, thereby leading to be Neutral or Selling.

Coming on to trading Options, whr the Retail trader lose in Option buying is whn not taking note of IV changes. In the coming days, 9600Call will increase in premium with its low IV moving into high IV. This IV data changes are hard to get, in continuous manner. In this age of fast computer trading, if any algorithm senses High IV in comparision, they eat the option premium like anything, before Retail trader can react.
Finally, they throw their towel n Go!!!
Also, another complication arises when IV changes start affecting the time value Theta! very hard fr Retail trader to handle after losing the towel!!!

Now, coming on to ur example fr Option trading, just on a broad level, in ur example 9600Call is saying 9600+118premium=9718 Nifty closure on expiry day. Ask urself if u buy the premium value, will it retain its value with Nifty closing above 9718+1pt(covering fee charges) on expiry? If u cant answer this question to urself, please develope the knack to answer tht question. Just remember tht u need to CORRECTLY answer tht question ONLY 7 out of 10 times!!!