Information about expected monthly range can be used by people who trade in derivative markets, especially the options traders as Implied volatility can be used to calculate the upper and a lower range of an underline derivative security. Option writers can use this expected monthly range to short the options above or below the expected monthly range, while Plain-Vanilla option buyers can use this upper and lower range to create spread positions i.e. Bull-Call spread, Bear-Put spread, Ratio spread etc in order to reduce their entry-level cost on their Plain-Vanilla positions.
What is IV?
Implied volatility (commonly referred to as volatility or IV) is determined by the current price of options contracts on a particular stock. Implied Volatility of an option contract is the volatility implied by the market price of an option based on an option pricing model. IV has a direct relation to the option premium, higher the IV, higher the option price.
How to calculate?
Since IV is a Standard Deviation. So, for a 1month range calculation:
Range calculation formula:
Expected Movement= Current market price* IV * Square root of (Days left to the expiry/Days in a year)
Expected Movement = 10226 (Nifty November expiry level)
*12%(Nifty IV level)*Square root of (28/365 ), which is 339.8 Points.
So we can expect a movement of +/- 340 points from the current level for the Nifty index in the mo8nth of December. An expected upper range will be 10566 and lower range will be 9886.
Remarks:
As per IV calculation, the NIFTY range for December is 10566 to 9886.
Range calculation success ratio with the help of IV until November is 8:3 i.e (Out of 11 months in 2017, only 3-months have seen an expiry above or below calculated range)
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