@siva@nithin@Abid_Hassan - Thanks for giving us the sneak preview. Firstly, it is the right step in right direction. Few observation:
What this tool is offering is primarily the pay-off at a certain strike price. I am presuming the IV mentioned is the IV of the chosen option strike. Pl confirm.
There are some firms which has a more advanced version of this feature (refer smartfinance.com). The author is striving on Volatility/SD to predict the possible ranges (up and down direction and corresponding pay offs)
I will be very interested to see option chain of any underlying which includes Greeks, ITM probability, IV. And the possibility to trade directly from the option chain data. I can tell you it will tremendously increase the trading effectiveness and efficiency.
Lastly, for heaven sake please-please-please compute and display real time the IV Percentile/IV rank of the underlying stock/index based how options are priced at any particular moment. This will put Zerodha as the leader in trading space instantly.
I am assuming your development team is taking inspiration from platforms like ThinkOrSwim (TOSS), Dough etc. If not, please spend some time there.
Yes, the IV mentioned is the IV of a specific price. Confirming it
I like what you are saying. And it makes sense. At a pure philosophical level, I have one reservation. I have observed, and you might agree, that the more number of metrics you show a normal retail person, the higher is the chance that he will find a pattern and trade when it does not exist. For example, delta is in a way the probability of ITM expiry. But if I tell someone that a .6 delta option will make money 6/10 times you know what disaster I am signing up for. The same applies for stock movement chances based on ATR etc. Worst, these numbers fail to capture extraordinary days like events when most people bet.
Option chain is already built. If our front end gods smile, you will see it in the coming week. ITM probability is dangerous. I like your suggestion of adding Greeks to Option chain. It will help me pick up lowest theta / vega bets in a glance. Adding that to feature request now.
IV percentile/ Rank. You will hate me for this but here is a problem.
It is damn easy to do it. After all it is just (Current IV - Lowest IV)/(Highest IV - Current IV). But here is my reservation. This is a lazy and misguiding metric. For example, all Fridays and long weekends will score low in IV rank. Doesnāt mean you go sell, right? Letās say I adjusted this to correct for weekends, how about events?
How about IV regime changes. Before 2011, one month IV of USDINR was around 3.5%. Then it went on a one way street which mean reverted at 17%. Now imagine applying IV rank here. At all points USDINR would show IV rank of 100 practically. What do I do with it?
Think of NIFTY. When the regime tapered to 9.5% somewhere in the middle of last year, IV rank consistently showed 0. Doesnāt mean buy, right?
PS: I have never used IV rank to trade professionally/ nor have I seen anyone talk about it. I could be wrong. If so please correct me and we will go to the drawing board. Promise
Spent quite a bit of time there. We will make something better
If you do have feature requests, opinions, queries, comments etc, please mail me at abid at sensibull.
Thanks a tonne for you pointers Anand![quote=āanand3174, post:43, topic:14234ā]
Finally after a long time I am having an opportunity to talk to someone who understand Option mathematics and the beauty behind it. Thank you for the constructive conversation. Few remarks to your response.
Point 2: I am OK if ITM probability is not computed as Delta gives good indication. However, if it is displayed, no harm as it is easy to comprehend from trader perspective.
Point 4:
I beg to differ on IV percentile/Rank. I cannot imagine option trading (specially as a writer) without having a sense or information on IV of the underlying relative to itself. It is fatal and I can only wish them Good Luck who writes/buy without knowing IV rank/percentile of the instrument they are trading/hedging.
In my mind high/low IV is the ONLY CRITICAL edge which makes options so beautiful (as IV is mean reverting unlike price/volume action). As you would agree option trading is quite different from future/stock trading where it is purely directional bet. Here in the world of options you can loose even if u are right and you can win even if you are wrong.
It should be left to the trader if he/she considers IV Rank or IV Percentile while making trading decision. Please get the IV percentile/IV Rank of the underlying based on how options are pricesā¦ It is just ONE value to be displayed . I am sure you will take clues from NIFTY VIX or CBOE VIX mathematics. I cannot emphasize more on the importance of IV Percentile/Rank
Lastly, my other wish would be if there can be a indicator which indicates liquidity aspect. Option trading in illiquid market is like a suicide mission Is it possible?
IV Rank
I will try to put it in a place where most people donāt see it A pro-mode or something. Or may be enable for you ID? Give us some time though, we will get you there.
Other way to figure out high IV:
Look at RV (Realized Volatility) for the last few days. If RV> IV then you will make money on a delta neutral portfolio (usually, minus some gamma considerations)
Another way in which we used to look at it was.
Compare Theta of your trade horizon with delta. And ask yourself the question - If IV stays where it is, what kind of move do I need on delta to compensate for Theta? This was a decent proxy.
On illiquidity:
Thanks for the suicide point! This is something we talk all the time about. Look at the first point here 7 sins of Option Trading by Sensibull
We are working on illiquidity detection. But our blanket advice to our users till we get there is stick to NIFTY and Bank nifty. And Stick to ATM/ OTM on NIFTY 50 stocks.
Finally after a long time I am having an opportunity to talk to someone who understand Option mathematics and the beauty behind it. Thank you for the constructive conversation. Few remarks to your response.
Point 2: I am OK if ITM probability is not computed as Delta gives good indication. However, if it is displayed, no harm as it is easy to comprehend from trader perspective.
Point 4:
I beg to differ on IV percentile/Rank. I cannot imagine option trading (specially as a writer) without having a sense or information on IV of the underlying relative to itself. It is fatal and I can only wish them Good Luck who writes/buy without knowing IV rank/percentile of the instrument they are trading/hedging.
In my mind high/low IV is the ONLY CRITICAL edge which makes options so beautiful (as IV is mean reverting unlike price/volume action). As you would agree option trading is quite different from future/stock trading where it is purely directional bet. Here in the world of options you can loose even if u are right and you can win even if you are wrong.
It should be left to the trader if he/she considers IV Rank or IV Percentile while making trading decision. Please get the IV percentile/IV Rank of the underlying based on how options are pricesā¦ It is just ONE value to be displayed . I am sure you will take clues from NIFTY VIX or CBOE VIX mathematics. I cannot emphasize more on the importance of IV Percentile/Rank
Lastly, my other wish would be if there can be a indicator which indicates liquidity aspect. Option trading in illiquid market is like a suicide mission Is it possible?
We will do this. I think the IV percentile and IV rank formula which is there is most places/ textbooks is not the best. You have an improvised logic for that? Just asking for suggestions. Will do my own math on the side
Hello Abid, Sivaā¦this tool looks good to start withā¦P&L analyser can be helpfulā¦howver I have question on IVā¦is the current IV mentioned in the tool is real time?..Is it aggregate value of call and puts ā¦since each strike have different IVā¦can we use the same tool for designing option strategies like credit debt spread and how the P&l changes with changes in IVā¦a simulaton kind of thing
Formula for IV Percentile is universal: āIV percentile is a measure of implied volatility vs its past values. This is best explained by an example: If Infy IV percentile is 34% ā It means that current IV value is higher than 34% of previous values (and of course, lower than 64% of them).ā
Is you question around computing IV of the underlying asset as reflected by option price at different strikes?
is the current IV mentioned in the tool is real time?..
Yes
Is it aggregate value of call and puts ā¦
since each strike have different IVā¦ can we use the same tool for designing option strategies like credit debt spread and how the P&l changes with changes in IVā¦a simulaton kind of thing
Wait for a couple of weeks max, we can give you what you want for spreads as a single tool [/quote]
Please mail me at abid at sensibull to get access to this, which is part of the greater product rollout
Hi Abid,
There is another school of though which uses 26 weeks (half year) percentile data. If you could consider this, this will add another dimension to see if percentile and 26 weeks percentile are in line then, take possible trade. higher probability trade.
@anand3174, thank you for sending this link, just a question, IV is different for each strike, keen to know how do they come up with a single value for each stock in that website?
Letās backup for a minute. Options are derivatives and their prices (at different strikes) at any point of time reflects the potential future volatility if the underlying is to touch that strike. IV is the only unknown factor while computing the option price/premium. It is not the volatility which option premium is to experience.
In summary, IV gives the sense on the future price volatility of the underlying. Hope this makes sense.
Although I am not a mathematician, but there are established mathematical formulas that compute the future price movement (in the form of SD) using IVs as reflected thru option premium at ATM and near OTM. This will be one single value. The closest is India VIX which provides NIFTY IV for next 30 days. It uses NIFTY options from front and next month. (more www.vix.co.in)
However, IV in itself does not tell us anything. We need to know if IV is High or Low compared to itself. This gives the sense that how much fear cost is priced inside option premium.
Ultimately we are all in this to see if we should buy or sell IV, right? We are evaluating many way to do the same. Sure, we will push IV rank, but we want to go further than that. We will keep you posted.