In our last article – Nifty May Option Implied Volatility indicates high associated costs – No option strategy until 16th May- dated 27th April 2014 click here to read full article discussed about the associated cost of purchase for call and put options. The Nifty index options had an implied volatility of 31% for at the money Put options and 28% for at the money Call options for the May 2014 series but in the last week of April 2014. There had been a rise in the implied volatility by 234% from the levels of 9.27% for at the money put options and by 97% from the levels of 14% for at the money call options that were seen for the Nifty index April 2014 series. The implied volatility for out of the money put and call options were at 29% and 27% respectively in the same time period.
In the month of May 2014 the implied volatility of Call and Put options has increased to the levels of 36% for at the money Put options and 34.5% for at the money Call options. This shows a 16% rise in the implied volatility for at the money Put options and a 23% rise in the implied volatility for at the money Call options. The nearing of the trading days with the elections results has increased the eagerness and anxiousness of the traders that has driven costs to expensive levels. The option premiums have slightly reduced for at the money call and put options as the reduction in the time value of option premiums has seen a marginal rise in the implied volatility. The May 2014 Nifty out of the money 6300 put and 7100 call option have a combined cost of Rs.8900 as against a cost of Rs.9550 seen in the last week of April 2014. The reduction in the time value of the option premium has been marginally compensated by the rise in implied volatility. Out of the money call and put option premiums have seen a dramatic rise in implied volatility levels to 35% and 34%. The spread in the implied volatility of at the money and out of the money put options has narrowed down to 0.5% to 1% from the initial 1% to 2% range.
Rise in the implied volatility associated with marginal decrease in the associated costs suggests heavy option writing by traders, particularly in out of the money call options.
The rise in the implied volatility levels is increasing the uncertainty associated with the gains from any of the relevant option strategy even though the outcome of the election results remains on the expected lines. Entering into an option strategy at this point of time can be significantly risky as a slight deviation from the expected outcome can drastically reduce the premium levels to negligible levels post 16th May 2014.