Volatility in the stock market is a very common phenomenon traders face while buying stocks or trading in the future & options (F&O) market. And in the options market volatility plays a major role in changing the price of the option chain of underlying stocks or indices.
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Implied volatility or IV is the expected volatility of the stock throughout the option. In option trading IV is used to determine and forecast the possible price movement of the underlying security or indices trading in the future and option market.
Implied volatility means the market or underlying stock can move in any direction either upward or downward.
The IV is influenced by many factors like demand and supply, sentiments, fear, and actions of the company.
Calculating the implied volatility is a very complicated process, as you need various data that have to be entered into the Black-Scholes formula and back-solving to find out the value of the volatility. However, there are various methods to calculate the implied volatility. And the simple one is iterative search, or trial and error to find IV value.
Implied Volatility Formula:
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Suppose the value of an at-the-money call option of a company XYZ is Rs 32.3 when the stock price is Rs 831.1, the strike price of the option is Rs 800, while the risk-free rate is 0.25% and the time to expire the contract is one day. Here, the implied volatility can be calculated by using the Black-Scholes model with the parameters given above, and by using the different values of implied volatility in the option pricing model to know the IV for a particular underlying stock or index.
The implied volatility is affected by many factors depending on the indices or stocks liquidity or volume of trade but the two are the most important factors that affect the implied volatility.
•Demand&Supply
•TimeValueofMoney Read More www.moneysukh.com
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