When someone mentions the implied volatility of a stock, is it the implied volatility of the stock on at the money strike prices? And if it is, is it for the call or put
I’m asking this because the implied volatility is different at different strike prices. So it is not clear which strike price is taken into account when we are just mentioning the implied volatility of a stock.
I am assuming that volatility of the underlying stock is completely different and is called as its historical volatility which is not its implied volatility.
Implied volatility is the Function of stock’s option prices and not the stock. stock does not have implied volitility. They only have historical or realized volitility. Now coming to your question i.e if someone says IV of stock is X%…usually they derive through some weighted average formula of IV of ATM and OTM option strike…as you have seen IV of different strike is not the same, hence stocks overall IV is derived from ‘strips’ of options from that stock…IV is just used to describe expected magnitude of stocks future price changes based on stock’s option prices…I hope this helps…let meknow if you have any questions
goldb thank you for your response. So far I’ve not found any place within the zerodha website where it gives an indication of how to exactly calculate the implied volatility of a particular stock? I know about the black scholes model but most of the examples do not exactly give a real-life scenario of determining the implied volatility of a stock
chiragjp - thank you for indicating that we take it through a weighted average formula of implied volatility at ATM and OTM options strike. Is this fated average formula standardised and a how far do we have to take out of the money strike prices in order to calculate the implied volatility.
In essence, I think I’m asking for an example of calculating the implied volatility of a particular stock and then matching it with the NSE calculated implied volatility for that stock and they should be equal. Somehow I’m not finding any clear example of this.
Thank you again for posting the responses so quickly
IV is function of the option prices and post 87 crash, the IV started getting skewed and appears lowest ATM and increases as you go further out on each side. This was to take into to account price shocks.
What you have to understand is that the current price of any option is nothing but its relative supply/demand.
The way you cannot accurately calculate the Premium/Discount of a Future, similarly you can’t have a formula to tell you what the real IV should be at any point in time.
Having said that, there is something call put-call parity that you can read about and that equation tries to balance the price of all the derivatives put together.
Now coming back to the prices, ever since program trading, algo or HFT etc have come iin, their large blackboxes sometimes using proprietary formulas try to arrive at a fair pricing given the current volatility of the mkt as well as the specific spot.
At retail level, its best to compute the IV from existing prices, compare with its HV(Hist. Vola) and use it to see whether its over-priced or under.
Hi @rvsw, I think @Chirag1 has given good answer to this…also NSE does not publish IV for individual stocks, They only give IV for individual strike prices for that particular stock which are determined by demand/supply of the options prices…Generally market participants tries to use this information to get the approximate level of IV…I am not sure how exactly they do it, since I am not using it myself… however some quants or algo trading software would give that data or might have this feature…You can run the calculation in excel but that would be too tedious and might not be worth it…The best as suggested by Chirag1… its best to compute the IV from existing prices, compare with its HV(Hist. Vola) and use it to see whether its over-priced or under…you can also use IndiaVIX for NIfty fo approx value…Zerodha thru sesibull is coming up with some advance option, I am not sure if this would be a part of it but yu can check it here…https://trade.sensibull.com/optionscalculator
It is wrong to mention this way.
Stocks have ‘Daily Volatility’ & ‘Annual Volatility’(Historical Volatility).
Implied Volatility is applicable only for the derivative Option contract and it is its Expected Volatility till expiry.