Volatility has a significant impact on the value of an option, but understanding the impact of volatility on an option** can be challenging. In this column, we will observe the impact of implied volatility on options** from two dimensions: static and dynamic.
Option sauce
1. The static effect of implied volatility on options**
The core of options trading is the premium, and in a low-volatility environment, the option contract has the advantages of reducing the cost and maximum loss, improving the winning rate, and increasing the investment return.
We measure the return of at-the-money options with 30-day expirations under different implied volatility backgrounds, and measure the yield of the underlying option contracts at different realizable increases at the expiration of the contract.
Through comparison, it is found that the influence of option** is very obvious by implied volatility, and the higher the implied volatility, the higher the option**. The most direct effect of high contracts** due to high implied volatility is to increase the break-even point of options contracts.
When the implied volatility is 10%** option contract, then only 50ETF**134%, you can achieve breakeven; When the implied volatility is 20%, the option contract, the 50ETF is 307% to achieve breakeven; And when the implied volatility reaches 40%, the 50 ETF will rise by at least 481% to break even! The evil consequence of raising the break-even point is that it reduces the probability of profitability of ** options. As we can see from the table above, assuming that the 50 ETF loses 3% after 30 days, investors in the call option contract can more than double the gain when the implied volatility is 10%, while investors who call options at the implied volatility of % will incur a loss. In a low implied volatility environment, call options only need a small amount of the underlying to make a profit, and the probability of profit is higher; In a high implied volatility environment, ** call options require a larger increase in the underlying to make a profit, and the probability of profit is low.
If the 50ETF rises by 10% as scheduled after 30 days, the call option contract can achieve a 648% gain in a low implied volatility environment (implied volatility of 10%), while the call option contract in a high implied volatility environment (implied volatility of 40%) is only about 108%;
It is even more noteworthy that a call option contract in a low implied volatility environment (implied volatility of 10%) will achieve a higher return of 3% at a 50 ETF than a 50% increase in a 50 ETF after a call option contract in a high implied volatility environment (implied volatility of 40%). It can be seen that options with high implied volatility** will significantly reduce their future return on investment.
2. The dynamic impact of implied volatility on options**
For investors who do not intend to hold options contracts for the long term, the dynamic changes in implied volatility have a greater impact on options** than static.
In general, in a 50-ETF with a small fluctuation**, the overall increase in the call contract is comparable to the overall decline in the put contract. However, in the **medium** option where the implied volatility is on the rise, there will be a situation of "looking in the right direction to rise more, and looking at the wrong direction to fall less". Backtracking**, only 066% of the time, the overall increase of the out-of-the-money subscription contract is greater than 20%; The overall decline of the put is less than 10%, and some out-of-the-money put contracts even show a contrarian trend.
Implied volatility is good for options, but implied volatility is good for options. In terms of backtesting, the 50ETF is slightly **0 on the same dayAt 38%, the overall decline of the out-of-the-money call part is more than 30%, but the overall increase of put options is less than 10%; It can be seen that in the **medium** option with downward implied volatility, there will be a situation of "looking in the right direction to rise less, and looking at the wrong direction to fall more". In extreme cases, a drop in implied volatility can even lead to both a call contract and a put contract, which is known in the market as a "long and short double kill".
3. How to judge the level of implied volatility
1.Compare Historical and Implied Volatility: Implied volatility is the expected future volatility that is reversed from the market for options. By comparing current implied volatility to historical volatility, it is possible to assess the current level of market expectations for future volatility. If the current implied volatility is higher than the past average, it indicates that the market is expected to be more volatile and the implied volatility may be higher.
2.Observe the level of implied volatility of similar options: Compare the level of implied volatility of options contracts with different expiration dates for the same underlying asset. Typically, the implied volatility of forward options will be higher than that of near-term options because they have a longer period of time to deal with possible future volatility. Therefore, if the implied volatility of an option is much higher than that of other options, it may mean that the market expects higher volatility for the underlying asset.
3.Use volatility indicators: Volatility indicators such as volatility verterates can help determine the current level of implied volatility. The volatility vertebrae is measured as the ratio between the current implied volatility and the historical volatility, and if the volatility vertebrae is greater than 1, the current implied volatility is higher than the historical volatility, and vice versa it is lower than the historical volatility.
4.Market sentiment and news analysis: Market sentiment and important news can also have an impact on implied volatility. For example, market expectations for upcoming important economic data or company earnings reports, as well as factors such as political events or geopolitical tensions, can affect investors' expectations for future volatility. Therefore, paying close attention to changes in market sentiment and news is also one of the important factors in judging the level of implied volatility. Options