#Indiavix Mathematical Calculation of Indiavix explained in a more simpler manner:
1) Understanding Option pricing :
a) Option premium is a function of Underlying price, Time to expiry, int rates, Strike price and most importantly implied Volatility (implied standard dev).....
1) Understanding Option pricing :
a) Option premium is a function of Underlying price, Time to expiry, int rates, Strike price and most importantly implied Volatility (implied standard dev).....
....
b) All these factors are combined together in the form of BSM (Black Scholes Model) to arrive at the option premium.
c) Important thing to rem is BSM assumes implied vol (IV) as constant and hence for a given IV, premium is calculated....
b) All these factors are combined together in the form of BSM (Black Scholes Model) to arrive at the option premium.
c) Important thing to rem is BSM assumes implied vol (IV) as constant and hence for a given IV, premium is calculated....
d) In reality IV is not constant. Hence market practice is to decide on IV and then reverse engineer the option premiums; technically it is IV that is getting traded from which premium is derived and displayed. ( Sonething similar time ytm getting traded in ....
.... debt markets and settled using price derived from ytm). In currency option markets worldwide, it is implied volatility that is quoted and these are called as vols.
This is a non technical explanation....
2) Understanding factors used for India VIX calculation:
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This is a non technical explanation....
2) Understanding factors used for India VIX calculation:
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a) Implied volatilities of Nifty near month most liquid OTM options. In the early part of the series it includes only the current month and as it progresses it includes the next month and scales down the IV to 30 day period.
b) The average IVs of the ....
a) Implied volatilities of Nifty near month most liquid OTM options. In the early part of the series it includes only the current month and as it progresses it includes the next month and scales down the IV to 30 day period.
b) The average IVs of the ....
....
the options described above reflects the VIX. This is an approximate explanation. The actual formula is slightly complex and can be found in the NSE website for those who are interested in mathematics of VIX.
3) VIX inference :
High VIX means higher uncertainty...
the options described above reflects the VIX. This is an approximate explanation. The actual formula is slightly complex and can be found in the NSE website for those who are interested in mathematics of VIX.
3) VIX inference :
High VIX means higher uncertainty...
.... and usually higher uncertainty is accompanied during bearish markets and hence VIX tends to be on the higher side in bearish markets which usually is very volatile. My prev tweet on VIX explains this aspect.
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Now important thing to understand is that when VIX crashes it means options are pricing in lesser uncertainty (relatively); usually lesser uncertainty is accompanied with bull markets and that’s why in general it is perceived that VIX cools off in bull markets...
Now important thing to understand is that when VIX crashes it means options are pricing in lesser uncertainty (relatively); usually lesser uncertainty is accompanied with bull markets and that’s why in general it is perceived that VIX cools off in bull markets...
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The most dangerous thing is that vix falling and also markets crashing. It implies option markets are pricing in lesser volatility, relatively with lesser uncertainty and the fact that market crash with lesser volatility can happen only when the direction ....
The most dangerous thing is that vix falling and also markets crashing. It implies option markets are pricing in lesser volatility, relatively with lesser uncertainty and the fact that market crash with lesser volatility can happen only when the direction ....
.... is relatively certain by majority players makes this combination of falling VIX and falling markets more dangerous.
Hope I have covered a technical concept in a non technical manner.
Hope I have covered a technical concept in a non technical manner.
