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Why Does Implied Volatility Increase as Stock Prices Drop?
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- Опубликовано: 14 авг 2024
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I am confused by the comment at 2:50. "If a stock is being bought consistently, the price will go up. If it's being sold consistently, the price goes down." Given it's impossible to sell something without someone else buying it as well. So, I get confused by this statement. I do understand that in options, I can sell something I don't own (shorting it), but you still have to have a buyer. # buyers = # sellers??
Any comment to clarify greatly and humbly appreciated.
So to summarize: market goes down -> predominantly long population experiences fear -> buy puts for hedging or speculation -> IV of puts increase.
But what about IV of calls when market goes down? If you want to profit from downward market movement you can sell calls or buy puts.
Wouldn’t selling calls actually decrease the IV of calls?
Great video!
If the s&p 500 rises, the IV as a whole falls. But the IV of calls would then rise, because the short sellers would still have to hedge or am i wrong?
SO when underlaying markets take big dips, IV Goes UP but the prices of options are actually going up because of the increase of activity in buying options for hedging. just confused at 3:54 "option prices are driving IV"
That's correct - since we can't know what IV is unless we back into it using the Black-Scholes model, changes in option prices actually drive IV and not the other way around.
Hey man here u get clarity, if underlying index price dip, hedging can done by onely put side, put side call price increase, IV fears indicater it can move any direction % wise up or down, it never tell you any direction.
we're assuming that we're in a normal (downside) skew, to begin with, aren't we? If we are in an upside skew then we'd expect that as prices go down implied volatility would go down as well. correct?
That's correct - there are a few commodities that reflect this type of behavior, but in this video, we're assuming we're talking about equities.
Thanks
What would be a good example of a commodity that acts like this?
GLD is a good one! Go 10 points below the stock price and look at the puts, and 10 points above the stock price and look at the calls - calls are trading for a higher price than equidistant puts, so there is reverse volatility skew or call skew, because gold has a perceived "floor" in terms of value (aka not zero)
Great explanation cheers mate
Very helpful video sir... But still I would like to know that when will both market and VIX increases together???
It happens sometimes, but it's rare - with the current market and most investors being long, that relationship wouldn't exist in the long term. If most investors were short the market, then that would be a situation where the VIX and the market would both increase regularly, since losses would be realized if the market went up, and hedging / option buying would take place.
When market sell off happens, people buy more PUTs to hedge and thereby increase PUT option prices. This increases IV and would help PUT sellers when IV is high. However, how does this work for CALL sellers. Since the price increase was for PUT options, high IV will certainly help PUT sellers. But just by looking at IV, in this scenario, if we sell CALLs would that help? By the way, thanks for all the efforts you guys put in for these videos. Appreciate your help.
in the first standard deviation why is it 68%, what's the reasoning and math behind that percent?
Awesome video thank you mike
For every buyer there is a seller and vice versa. Do you mean when there is more sellers trying to sell at once and buyers trying to buy at once? I imagine it's like an on going auction.
hi...i bougt put..after buying, market was falling fast but put price was not increasing ..it was decreasing...how come..please help
on what stock? Did you buy a weekly and hold to expiration? Feel free to shoot an email to support@tastytrade.com with more detail and we can explain there.
Because when you bought the put at that specific time the IV was high and then the IV went low so your put didn't gain even though the underlying price went down
Only put prices affect IV?
I get it now. Buy before volatility goes up. Don't get greedy. Sell before volatility reaches it's high. Chances are, high volatility at it's peak will drop like a rock because that's when everyone is selling their options. A large swing in your direction but at a loss if you don't get out fast.
If it were only that simple we would all be millionaires!
@@ricomajestic I think it's that simple but trading with a reasonable position sizing won't let you "be a millionare" off that strategy
Mike or Tasty crew, is my understanding correct? if abc @ 100usd, and has 20%iv for next month, its expected to move 20usd up or down, 68% of time (?)
If the timeframe was annual, yes that would be the case. IV% is presented on an annual basis, but if you're looking at a lesser timeframe, that must be accounted for. The tastyworks platform does this automatically and shows you the +- number for the cycle, but you can do this on your own too:
ruclips.net/video/8dqH2fuPLyA/видео.html
Stock Price x IV x SqRt(DTE/365) = Expected Move.
Thanks ， useful～
so，lots of option trade from long-term investor insurance？not from option trader？
"IV is a reflection of option activity and not the other way around" - need more explaination.
IV is a reflection of option premium, in other words, we don't know IV until we take our known variables and solve for IV using the Black-Scholes formula. Therefore, option prices drive IV and they have a postiive correlation because of this.
@@tastyliveshow gee whiz its like you explained that lmao
After looking this video I am still a bit confused because the word of volatility means as follows:
"Volatility is a variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration."
So it should be a directionless information.
Now you are saying everytime the volatility increases the stock prices will go down... I understand the options pricing will go up/down because of demand/supply but why is it the stock prices are going up with less volatility and down with more volatility.
How I understand the word of volatility is that when we see the volatility goes up then the stock prices can fluctuate more up OR down.
Or is this something to do with the Implied Volatility which is different from pure Volatility ?
Implied Volatility is certainly directionless by nature, but the fluctuation of implied volatility is generally the result of market selloffs & market rallies.
When a market sells off, fear tends to increase and people start to purchase options, which will increase the prices and expand implied volatility. When a market rallies, fear tends to decrease and people sell off those hedges they purchased, reducing their value and reducing implied volatility.
The best example to look at is simply a graph of SPY and VIX side by side. This explains the general relationship of implied volatility and how it expands & contracts based on market moves.
Thanks for the answer.
Jim Bebop Stock Volume tends to go high when stock holders sell off their shares whenever there is a panic as a result of a company's underperformance of expected results, lawsuits, bankruptcies, etc. It is tied to supply/demand of number if shares outstanding. When prices go up steadfastly, market volume slows down, and when prices drop, volume inxreases.
From this I am guessing when IV goes down (more often the market will be rallying) we will more likely make money just buying a call option.
when people are buying puts theres also people selling calls
Safe IV zone
1 SD is actually 65% not 68%. 2 SD is 95% and 3 SD is 99.7%
68.2%
This is confusing
Which part? It seemed alright to me.