“Analysis of Impact of Implied Volatility with Changes In Option Price,

Days till Expiry and Important Events”

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR

Masters in Management Studies (M.M.S.)

(Two Years Full-time) Degree Course

ROLL NO. F-22

University of Mumbai

Jamnalal Bajaj Institute of Management Studies

Mumbai

Analysis Of Implied Volatility With Changes In Option Price Page 1

 Acknowledgement

This report is a culmination of my efforts during my third and fourth semesters of

Masters in Management Studies course at JBIMS, Mumbai. The year long project has

been a great learning experience for me and I have been ably guided and supported in

my endeavor by many people whom all I wish to thank.

I would like to extend my heart-felt gratitude to my guide for his support and help

during the course of the entire year. This project would not have been possible without

his guidance. I really appreciate his effort while helping me make this project report

which I believe has enhanced my knowledge applying the skills on the topic I had

chosen. I gratefully thank The Director, JBIMS for giving me an opportunity to undertake

such a useful thesis. I am also thankful to the respectable faculty members at JBIMS for

their teachings and thorough concept building in various managerial disciplines which

helped a lot during the course of this project.

Analysis Of Implied Volatility With Changes In Option Price Page 2

 Table of Contents

1. Introduction
2. Problem Statement
3. Conceptual and Theoretical Background
4. Review of Related Literature
5. Scope & Limitations
6. Objectives of the study
7. Hypothesis
8. Research Methodology
9 Data Analysis
10. Conclusion
11. References

Analysis Of Implied Volatility With Changes In Option Price Page 3

 Table of Diagrams

1. Figure 10.1: IV vs. Days Till Expiry- NIFTY 50-Oct 10000 CE

2. Figure 10.2: IV vs. Days Till Expiry- NIFTY 50-Sep 10000 CE
3. Figure 10.3: IV vs. Days Till Expiry- NIFTY 50-Aug 10100 CE
4. Figure 10.4: IV vs. Days Till Expiry- NIFTY 50-Jul 9700 CE
5. Figure 10.5: IV vs. Days Till Expiry- NIFTY 50-Jun 9600 CE
6. Figure 10.6: IV vs. Days Till Expiry- NIFTY 50-May 9500 CE
7. Figure 10.7: PNB 140 CE
8. Figure 10.8: SBI 270 CE
9. Figure 10.9: RELIANCE 1700 CE
10. Figure 10.10: ITC 300 CE
11. Figure 10.11: BHEL 150 CE
12. Figure 10.12: ICICI 280 CE
13. Figure 10.13: AIRTEL 400 CE
14. Figure 10.14: AXIS 540 CE
15. Table 10.1: Regression output of IV vs. Option Price

Analysis Of Implied Volatility With Changes In Option Price Page 4

 1.Introduction

Implied volatility (IV) is a key component in determining an option price. In financial

markets, the price of a vanilla call or put option on a risky asset is often quoted in terms

of the implied volatility. Theoretically, the price of an option is determined by the Black-

Scholes- Merton Model which uses expected volatility as one of its inputs to determine

the option price. Implied volatility might best be described as a reflection of the level of

uncertainty over the stock's future price direction. For example, if a stock has been

trending lower on the charts for some time, IV might be relatively muted, since the

bearish price action has been widely accepted as a trend by the majority of investors.

Analysis Of Implied Volatility With Changes In Option Price Page 5

 2.Problem Statement

Implied Volatility is influenced by a variety of factors like:.

 Option Price

 Risk free rate

 Time till expiry of the option

 Option being In the Money (ITM) or out of the money (OTM)

 Scheduled events

The problem statement of this paper hence is to study how the implied volatility gets

affected by all the above factors. Top 10 actively traded options in the Indian derivatives

markets will be studied. The data will contain price of the option, implied volatility, strike

price, days till expiry and risk free rate. The scope of the project will be discussed in

detail.

Analysis Of Implied Volatility With Changes In Option Price Page 6

 3.Conceptual and Theoretical Background

Implied volatility (IV) is a key component in determining an option price.

Definition:

Implied volatility is a forward-looking metric measuring the market's expectations for the

underlying equity's performance during the life span of the option.

Interpretation:

Implied volatility might best be described as a reflection of the level of uncertainty over

the stock's future price direction. For example, if a stock has been trending lower on the

charts for some time, IV might be relatively muted, since the bearish price action has

been widely accepted as a trend by the majority of investors.

• IV vs. Option Price

All other things being equal, implied volatility and the option price will move in the same

direction. That is, when IV rises, option premiums will also rise. When IV falls, option

premiums will also decline.

• IV vs. Market Expectations

IV represents how much movement the market expects from the underlying stock during

the life span of the option. In that respect, an option buyer is partially buying the

market's expectations for that stock.

Analysis Of Implied Volatility With Changes In Option Price Page 7

• IV for Option Buyer and Seller

Once an options position has been entered, rising IV is a positive for the option buyer,

as it will increase the price the trader can collect for selling to close the option -- but it's

negative for the option seller, as it will become costlier to buy to close the option. On the

other side of the coin, declining IV is a negative for the option buyer, and a positive for

the option seller.

• IV Effect on ITM/OTM Option

Whether positive or negative, the impact of IV on option price is greatest on at-the-

money and out-of-the-money options. That's because these contracts carry no intrinsic

value, and the entire premium is based on time value -- of which IV is a significant

component. Conversely, fluctuations in IV will have a relatively muted impact on the

value of in-the-money options, as time value accounts for only a portion of the option's

worth.

• IV vs. Scheduled Events

Regardless of the equity's direction -- IV tends to rise ahead of scheduled events, such

as earnings reports, regulatory rulings, or product launches. These types of events have

the ability to spark major moves or directional changes in the underlying stock, and the

expectation of a post-event reaction pushes IV higher. After the catalyst passes, IV will

immediately deflate, as traders price their reactions directly into the shares.

• IV vs. Historical Volatility (HV)

Analysis Of Implied Volatility With Changes In Option Price Page 8

For a rough guide as to whether implied volatility is running high, low, or right on par, an

option's IV can be compared against the stock's historical volatility (HV) for a

comparable time frame. If IV is significantly higher than HV, it could signal a situation

where IV is inflated. When IV is notably lower, it may indicate an opportunity for option

buyers to find some relative bargains

The Black Scholes Model (Black – Scholes – Merton)

The Black Scholes Model is the first model that has been used extensively for valuing

options. The main purpose of this model is to find European-Style options’ theoretical

values. The inputs required for this model include current stock prices, the option’s

strike price, the expected dividends, expected interest rates, expected volatility and time

to expiration. Previous researchers also had correctly calculated the expected payoff

from a European Option. But, it had been difficult to know the correct discount rate used

for the option payoff. This is where Black and Scholescome into picture. They used

Capital Asset Pricing Model to find out the relationship between the market’s return on

the option and the required return on the stock.

The formula was developed by three economists and is one of the most well-known

options pricing model. This model was introduced in 1973 paper “The Pricing of Options

and Corporate Liabilities” published in the journal of Political Economy.

The assumptions made in the Black – Scholes model are as follows:-

1. There exists no transaction costs in buying the option

Analysis Of Implied Volatility With Changes In Option Price Page 9

2. The returns on the underlying are normally distributed

3. The option is European and can only be exercised at expiration

4. The risk-free rate and volatility are known and constant

5. The markets are efficient. i.e. market movement are not possible to be predicted

6. The dividends are not paid out during the life of the option.

(Adaptation with respect to dividends are made in this model by determining the ex-

dividend date value of the underlying stock).

Black – Scholes Formula

The above model is consists of two main parts : the first part, SN (d1) multiplies the

price by the change in the call premium in relation to a change in the underlying price.

Analysis Of Implied Volatility With Changes In Option Price Page 10

This part focuses on the expected benefit of purchasing the underlying outright. The

second part, , N(d2)Ke-rt, provides the current value of paying the exercise price upon

expiration. The value of the option, then, is calculated by taking the difference between

the two parts, as shown in the equation above.

Black Scholes Model

Analysis Of Implied Volatility With Changes In Option Price Page 11

The VIX Index

VIX-CBOE volatility index is the market expectation of 30-day volatility. The volatility of

S&P 500 stocks are taken into consideration while calculation. This is calculated using

both calls and puts and is usually a measure of market risk. It is also referred to as

“investor fear gauge”.

This index has later led to the formation of two more indices namely, VXN that tracks

the NASDAQ 100 and the VXD which tracks the DJIA. VIX is considered to be the first

successful attempt at creating and implementing volatility index. Initially it was limited to

8 S&P 100 at the money put and call options. But, gradually this increased to S&P 500.

The broader ample space allows for a more accurate view of investors’ expectations on

future market volatility.

The VIX is a computed index, much like the S&P 500 itself, although it is not derived

based on stock prices. Instead, it uses the price of options on the S&P 500, and then

estimates how volatile those options will be between the current date and the option's

expiration date. The CBOE combines the price of multiple options and derives an

aggregate value of volatility, which the index tracks.

While there is not a way to directly trade the VIX, the CBOE does offer VIX options,

which have a value based on VIX futures and not the VIX itself. Additionally, there are

24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total

number to 25.

Analysis Of Implied Volatility With Changes In Option Price Page 12

India VIX

India VIX is the name for Indian Volatility Index, an index under National Stock

Exchange. It measures the degree of volatility that active traders expect in the Nifty 50

over the next 30 days.

The VIX calculation is based on the Black Scholes Model which is used to price Option

Contracts. The VIX arrives at the volatility expected by traders in the market by back

working from buy sell prices of Nifty option contracts.

It is a good indicator of whether participants are feeling fearful or complacent about the

near future. It represents the expected annualised change in the Nifty 50 over the next

30 days. A VIX of 12 means that for the next one month, market participants expect the

Nifty to move by an annualised rate of 12 percent in either direction.

The low value of VIX indicates that the fear factor in the current market is low. A

relatively benign VIX is another indicator that one should consider while trading in Indian

markets.

Analysis Of Implied Volatility With Changes In Option Price Page 13

 4. Review of Related Literature

There has been considerable research on the forecasting ability and information content

of the Black—Scholes (B—S; Black and Scholes, 1973) implied volatility. Since option

prices reflect market participants' expectations of future movements of the underlying

asset, the volatility implied from option prices is widely believed to be informationally

superior to the historical volatility of the underlying asset. If the option market is

informationally efficient and the B—S model is correct, implied volatility is expected to

subsume all information contained in historical volatility and provides a more efficient

forecast for future volatility.

More recent research attempts to correct various data and methodological problems in

earlier studies. These studies [e.g., Christensen and Prabhala (1998), Christensen,

Hansen, and Prabhala (2001), Blair, Poon, and Taylor (2001), Ederinton and Guan

(2002), and Pong et al. (2004)] consider longer time series to take into account

possible regime shift around the October 1987 crash, use instrumental variables (IVs)

to correct for the errors- in-variable (EIV) problem in implied volatility, adopt high-

frequency asset returns to provide a more accurate estimate for realized volatility, or

use no overlapping samples to avoid the "telescoping overlap" problem. Collectively,

these studies present evidence that implied volatility is a more efficient forecast for

future volatility than historical volatility.

Analysis Of Implied Volatility With Changes In Option Price Page 14

 5.Scope & Limitations

The study will analyze the behavior of implied volatility of top 10 actively traded stocks

in the Indian derivatives market. 2 actively traded indices- NIFTY and BANKNIFTY are

included in the analysis. It aims to understand how implied volatility changes with

changes in days till expiry, option price, any scheduled event like corporate action, news

about the company, news about the economy etc. From the aforementioned analysis

suggestions about when to buy a stock or when to sell can be drawn out. These findings

will be a quantitative proof for the findings supplemented by the literature review.

A limitation of the project would be that the price of an option may not be a true indicator

of the health of a particular stock.

Analysis Of Implied Volatility With Changes In Option Price Page 15

 6.Objectives of the study

Following are the objectives of the project: -

1. To analyse behaviour of Implied volatility with option price

2. To analyse behaviour of Implied volatility with days till expiry of the option

3. To analyse behaviour of Implied volatility with any scheduled events

4. To analyse behaviour of Implied volatility with option being In the Money (ITM) or

out of the money (OTM)

Analysis Of Implied Volatility With Changes In Option Price Page 16

 7.Hypothesis

The following hypotheses have been formulated and with the real data the project will

either prove or disprove them.

H0: Implied volatility has no correlation with the option price

H1: Implied volatility has positive correlation with the option price

Analysis Of Implied Volatility With Changes In Option Price Page 17

 8.Research Methodology

This research has been carried out in order to investigate the impact of various

parameters like changes in days till expiry, option price, any scheduled event like

corporate action, news about the company, news about the economy, risk free rate, on

the implied volatility.

Secondary research was carried out to collect the relevant data for top 10 actively

traded stocks in the Indian derivatives market namely NIFTY, BANKNIFTY, State Bank

of India (SBI), Punjab National Bank (PNB), Reliance Industries Ltd (RIL), ITC, Bharat

Heavy Electronics Ltd. (BHEL), ICICI Bank, Airtel, Axis Bank. 6 months’ sample for

every actively traded option was taken.

Analysis Of Implied Volatility With Changes In Option Price Page 18

 10. Data Analysis
NIFTY 50
Risk free
Oct Nifty 50 rate 7
10000 Spot Implied Mean
  CE Price Volatility Volatility
28-Sep-17 44.25 9768.95 10.20% 10.53%
29-Sep-17 37.65 9788.6 9.10% 10.53%
3-Oct-17 50.55 9859.5 9.14% 10.53%
4-Oct-17 62.55 9914.9 8.45% 10.53%
5-Oct-17 54.45 9888.7 8.98% 10.53%
6-Oct-17 87.8 9979.7 8.43% 10.53%
9-Oct-17 92.95 9988.75 9.53% 10.53%
10016.9
10-Oct-17 99.45 5 8.77% 10.53%
11-Oct-17 78.15 9984.8 8.82% 10.53%
12-Oct-17 145 10096.4 8.40% 10.53%
10167.4
13-Oct-17 214.1 5 11.28% 10.53%
10230.8
16-Oct-17 266.5 5 13.83% 10.53%
10234.4
17-Oct-17 262.1 5 12.76% 10.53%
10210.8
18-Oct-17 241.75 5 14.19% 10.53%
10146.5
19-Oct-17 163.5 5 7.87% 10.53%
10184.8
23-Oct-17 190.65 5 7.39% 10.53%
24-Oct-17 219.15 10207.7 21.92% 10.53%
10295.3
25-Oct-17 284.8 5 0.00%  
26-Oct-17 336.8 10343.8 0.00%  
Figure 10.1

Analysis Of Implied Volatility With Changes In Option Price Page 19

 Implied Volatility vs no of Days till Expirty
Nifty Oct 10000 CE
25.00%

20.00%

15.00% Implied Volatility

Mean Volatility
10.00%
Axis Title
5.00%

0.00%
17 1 7 17 17 17 1 7 17 1 7 1 7 17 1 7 1 7 1 7 17 17 1 7 1 7
ep- ep- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct- ct-
-S -S -O -O -O -O -O -O -O -O -O -O -O -O -O -O -O
2 8 29 3 4 5 6 9 1 0 1 1 12 1 3 1 6 1 7 18 19 2 3 2 4

Risk free
Sept Nifty 50   rate 7
10000 Spot Implied Mean
  CE Price Volatility Volatility
31-Aug-17 83.4 9917.9 8.84% 11.55%
1-Sep-17 113.7 9974.4 9.27% 11.55%
4-Sep-17 83.8 9912.85 10.14% 11.55%
5-Sep-17 96.3 9952.2 9.85% 11.55%
6-Sep-17 81.05 9916.2 10.33% 11.55%
7-Sep-17 85.4 9929.9 10.47% 11.55%
8-Sep-17 79.45 9934.8 9.94% 11.55%
11-Sep-17 104.95 10006.05 9.80% 11.55%
12-Sep-17 148.8 10093.05 8.40% 11.55%
13-Sep-17 136.05 10079.3 8.51% 11.55%
14-Sep-17 150.2 10086.6 10.36% 11.55%
15-Sep-17 140.3 10085.4 9.55% 11.55%
18-Sep-17 191.45 10153.1 11.48% 11.55%
19-Sep-17 184.2 10147.55 11.82% 11.55%
20-Sep-17 183.25 10141.15 13.87% 11.55%
21-Sep-17 154.6 10121.9 11.89% 11.55%
22-Sep-17 53.6 9964.4 12.73% 11.55%
25-Sep-17 13.3 9872.6 14.90% 11.55%
26-Sep-17 6.15 9871.5 14.35% 11.55%
27-Sep-17 0.9 9735.75 24.58% 11.55%
28-Sep-17 0.05 9768.95 0.00%  
Figure 10.2

Analysis Of Implied Volatility With Changes In Option Price Page 20

 Implied Volatility vs no of Days till Expirty
Nifty Sept 10000 CE
30.00%
25.00%
20.00% Implied Volatility
15.00% Mean Volatility
10.00%
Axis Title
5.00%
0.00%
17 17 17 17 17 17 17 17 17 17
ug- ep- ep- ep- ep- ep- ep- ep- ep- ep-
-A S S S -S -S -S -S -S -S
31 4- 6- 8- 12 14 18 20 22 26

Risk free
Aug Nifty 50   rate 7
10100 Spot Implied Mean
  CE Price Volatility Volatility
27-Jul-17 104.95 10020.55 9.37% 11.03%
28-Jul-17 92.9 10014.5 8.81% 11.03%
31-Jul-17 122.65 10077.1 8.82% 11.03%
1-Aug-17 140.45 10114.65 8.67% 11.03%
2-Aug-17 119.2 10081.5 8.78% 11.03%
3-Aug-17 82.7 10013.65 8.84% 11.03%
4-Aug-17 107.95 10066.4 9.01% 11.03%
7-Aug-17 99.1 10057.4 9.45% 11.03%
8-Aug-17 61.4 9978.55 9.46% 11.03%
9-Aug-17 41.3 9908.05 10.07% 11.03%
10-Aug-17 24.05 9820.25 10.72% 11.03%
11-Aug-17 13.3 9710.8 11.91% 11.03%
14-Aug-17 15.45 9794.15 11.23% 11.03%
16-Aug-17 25.15 9897.3 10.56% 11.03%
17-Aug-17 21 9904.15 10.00% 11.03%
18-Aug-17 13.1 9837.4 11.06% 11.03%
21-Aug-17 5.55 9754.35 12.85% 11.03%
22-Aug-17 4.3 9765.55 12.54% 11.03%
23-Aug-17 4.55 9852.5 10.49% 11.03%
24-Aug-17 2.95 9857.05 10.13% 11.03%
28-Aug-17 3.15 9912.8 12.99% 11.03%
29-Aug-17 0.85 9796.05 19.18% 11.03%
30-Aug-17 0.5 9884.4 18.70% 11.03%

Analysis Of Implied Volatility With Changes In Option Price Page 21

 31-Aug-17 0.05 9917.9 0.00%  
Figure 10.3

Implied Volatility vs no of Days till Expirty

Nifty Aug 10100 CE
25.00%
20.00%
15.00% Implied Volatility
Mean Volatility
10.00%
Axis Title 5.00%
0.00%
7 7 7 7 7 7 7 7 7 7 7 7
l-1 l-1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1
J- u -Ju Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug
27 31 2- 4- 8 - 1 0 - 14 - 1 7 - 2 1 - 23 - 2 8 - 3 0 -

Risk free
Jul Nifty 50   rate 7
Spot Implied Mean
  9700 CE Price Volatility Volatility
29-Jun-17 35.3 9504.1 8.46% 6.41%
30-Jun-17 34.5 9520.9 8.05% 6.41%
03-Jul-17 58.7 9615 7.84% 6.41%
04-Jul-17 58.45 9613.3 8.14% 6.41%
05-Jul-17 63.85 9637.6 7.85% 6.41%
06-Jul-17 72.45 9674.55 7.08% 6.41%
07-Jul-17 67.15 9665.8 7.27% 6.41%
10-Jul-17 126.35 9771.05 7.40% 6.41%
11-Jul-17 131.05 9786.05 6.74% 6.41%
12-Jul-17 154.4 9816.1 6.95% 6.41%
13-Jul-17 207.05 9891.7 0.00% 6.41%
14-Jul-17 215.45 9886.35 7.94% 6.41%
17-Jul-17 241.85 9915.95 10.79% 6.41%
18-Jul-17 163.6 9827.15 11.31% 6.41%
19-Jul-17 222.95 9899.6 11.76% 6.41%
20-Jul-17 193.05 9873.3 10.67% 6.41%
21-Jul-17 211.4 9915.25 0.00% 6.41%
24-Jul-17 251.75 9966.4 0.00% 6.41%
25-Jul-17 268.1 9964.55 0.00% 6.41%
26-Jul-17 319.15 10020.65 0.00% 6.41%
27-Jul-17 319.35 10020.55 0.00%  
Figure 10.4

Analysis Of Implied Volatility With Changes In Option Price Page 22

 Implied Volatility vs no of Days till Expirty
Nifty July 9700 CE
14.00%
12.00%
10.00%
Implied Volatility
8.00%
Mean Volatility
6.00%
Axis Title 4.00%
2.00%
0.00%
7 7 7 7 7 7 7 7 7 7
n-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1
u u u u u u u u u
-Ju -J -J -J -J -J -J -J -J -J
29 03 05 07 11 13 17 19 21 25

Risk free
Jun Nifty 50   rate 7
Spot Implied Mean
  9600 CE Price Volatility Volatility
25-May-17 56.25 9509.75 6.16% 8.76%
26-May-17 90.7 9595.1 5.45% 8.76%
29-May-17 112.95 9604.9 7.50% 8.76%
30-May-17 121.25 9624.55 7.34% 8.76%
31-May-17 121.6 9621.25 7.79% 8.76%
01-Jun-17 117 9616.1 7.89% 8.76%
02-Jun-17 123.5 9653.5 6.19% 8.76%
05-Jun-17 141.45 9675.1 7.25% 8.76%
06-Jun-17 129.25 9637.15 9.14% 8.76%
07-Jun-17 133.15 9663.9 7.82% 8.76%
08-Jun-17 125.45 9647.25 8.59% 8.76%
09-Jun-17 131.15 9668.25 7.84% 8.76%
12-Jun-17 90.55 9616.4 8.08% 8.76%
13-Jun-17 85.1 9606.9 8.47% 8.76%
14-Jun-17 94.8 9618.15 9.28% 8.76%
15-Jun-17 74.05 9578.05 9.89% 8.76%
16-Jun-17 65.85 9588.05 8.53% 8.76%
19-Jun-17 103.45 9657.55 9.41% 8.76%
20-Jun-17 102.05 9653.5 10.37% 8.76%
21-Jun-17 84.95 9633.6 10.40% 8.76%
22-Jun-17 67.6 9630 8.30% 8.76%
23-Jun-17 41.15 9574.95 9.91% 8.76%

Analysis Of Implied Volatility With Changes In Option Price Page 23

 27-Jun-17 9.25 9511.4 13.27% 8.76%
28-Jun-17 2.85 9491.25 15.38% 8.76%
29-Jun-17 0.1 9504.1 0.00%  
Figure 10.5

Implied Volatility vs no of Days till Expirty

Nifty June 9600 CE
16.00%
12.00% Implied Volatility
8.00% Mean Volatility

Axis Title 4.00%

0.00%
7 7 7 7 7 7 7 7 7 7 7 7
-1 y-1 y-1 n-1 n-1 n-1 n-1 n-1 n-1 n-1 n-1 n-1
ay a a u u u u u u u u u
-M 9-M 1-M 02-J 06-J 08-J 12-J 14-J 16-J 20-J 22-J 27-J
25 2 3

Risk free
May Nifty 50   rate 7
Spot Implied Mean
  9500 CE Price Volatility Volatility
27-Apr-17 38.75 9342.15 8.48% 9.72%
28-Apr-17 28.05 9304.05 8.61% 9.72%
02-May-17 27.2 9313.8 8.63% 9.72%
03-May-17 26.95 9311.95 8.91% 9.72%
04-May-17 33.55 9359.9 8.37% 9.72%
05-May-17 21.1 9285.3 9.40% 9.72%
08-May-17 20.8 9314.05 9.29% 9.72%
09-May-17 19.35 9316.85 9.26% 9.72%
10-May-17 33.45 9407.3 8.13% 9.72%
11-May-17 37.55 9422.4 8.33% 9.72%
12-May-17 28.55 9400.9 8.27% 9.72%
15-May-17 36.4 9445.4 8.42% 9.72%
16-May-17 68.15 9512.25 8.84% 9.72%
17-May-17 72.2 9525.75 8.81% 9.72%
18-May-17 29.25 9429.45 10.19% 9.72%
19-May-17 25.75 9427.9 10.45% 9.72%
22-May-17 19.4 9438.25 12.16% 9.72%
23-May-17 7.2 9386.15 14.55% 9.72%
24-May-17 1.15 9360.55 15.64% 9.72%
25-May-17 8.7 9509.75 0.00%  
Figure 10.6

Analysis Of Implied Volatility With Changes In Option Price Page 24

 Implied Volatility vs no of Days till Expirty
Nifty May 9500 CE
16.00%
12.00% Implied Volatility
8.00% Mean Volatility

Axis Title 4.00%

0.00%
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
pr-1 pr-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1 ay-1
-A -A -M -M -M -M -M -M -M -M -M -M -M -M -M -M -M -M -M
27 28 0 2 0 3 0 4 0 5 08 09 10 11 1 2 15 16 17 18 1 9 2 2 2 3 2 4

Analysis Of Implied Volatility With Changes In Option Price Page 25

Figure 10.7

Implied Volatility vs Days Till Expiry

PNB 140 CE
80.00%
60.00%
40.00%
20.00%
0.00%
17 17 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
e p- e p- c t-1 c t-1 ct-1 ct-1 ct-1 ct-1 ct-1 ct-1 c t-1 ct-1 c t-1 c t-1 c t-1 c t-1 ct-1
-S -S -O -O -O -O -O -O -O -O -O -O -O -O -O -O -O
28 29 03 04 05 06 09 10 11 12 13 16 17 18 19 23 24

Implied Volatility Mean volatility

Figure 10.8

Implied Volati lity vs Days Till Expiry

SBI 270 CE
60.00%
40.00%
20.00%
0.00%
7

03 17

04 17

05 17

09 17

10 17

12 17

17 17

19 17

23 17

25 17
06 17

11 17

13 17

16 17

18 17

24 17

26 17

7
-1

-1
-

-
-

-
ep

ep

ct

ct

ct

ct

ct

ct

ct

ct

ct
ct

ct

ct

ct

ct

ct

ct

ct
-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O

-O
-S

-S
28

29

Implied Volatility Mean Volatility

Figure 10.9

Implied Volati lity vs. Days Till Expiry

1700 CE Reliance Industries
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
7 7 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17
l-1 l-1 - - - - - - - - - - - - - - - - - - - - -
J- u -Ju Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug
28 1 - - - - - - - - - - - - - - -
3 01 02 03 04 07 08 09 10 11 14 16 17 18 21 22 23 24 28 29 30 31 - - - - - -

Implied Volatility Mean

Volatility

Analysis Of Implied Volatility With Changes In Option Price Page 26

Figure 10.10

Implied Volati lity vs. Days Till Expiry

300 CE ITC
80.00%
40.00%
0.00%
7 7 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17
l-1 l-1 - - - - - - - - - - - - - - - - - - - - -
J- u -Ju Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug
28 31 01- 02- 03- 04- 07- 08- 09- 10- 11- 14- 16- 17- 18- 21- 22- 23- 24- 28- 29- 30- 31-

Implied Volatility Mean

Volatility

Figure 10.11

Implied Volati lity vs. Days Till Expiry

150 CE BHEL
150.00%
100.00%
50.00%
0.00%
31 -17

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7
-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7

-A 7
7
01 l-1

08 g-1

09 g-1

10 g-1

11 g-1

14 g-1

22 g-1

23 g-1

24 g-1
02 g-1

03 g-1

04 g-1

07 g-1

16 g-1

17 g-1

18 g-1

21 g-1

28 g-1

29 g-1

30 g-1

31 g-1

-1
l

ug
-Ju

-Ju

u
u

u
28

Implied Volatility Mean

Volatility

Figure 10.12

Implied Volati lity vs. Days Till Expiry

ICICI 280 CE
60.00%
50.00%
40.00%
Implied Volatility

30.00% Implied Volatility

20.00%
Mean Volatility
10.00%
0.00%
17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17
09- 09- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10- 10-
- - - - - - - - - - - - - - - - - - -
28 29 03 04 05 06 09 10 11 12 13 16 17 18 19 23 24 25 26

Date

Analysis Of Implied Volatility With Changes In Option Price Page 27

Figure 10.13

Implied Volatility vs. Days TIll Expiry

400 CE Airtel
80.00%
70.00%
60.00%
50.00%
Implied Volatility

40.00% Implied Volatility

30.00% Mean Volatility
20.00%
10.00%
0.00%
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
-1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1
- 09 -09 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10
28 29 03 04 05 06 09 10 11 12 13 16 17 18 19 23 24 25 26

Date

Figure 10.14

Implied Volati lity vs Days Till Expiry

Axis 540 CE
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
3 4 7 8 9 0 1 4 5 6 7 8 1 3 4 5 8 9 0 1 5 6 7
94 94 94 94 94 95 95 95 95 95 95 95 96 96 96 96 96 96 97 97 97 97 97
42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42 42

Implied Volatility Mean Volatility

Analysis Of Implied Volatility With Changes In Option Price Page 28

Regression output for Implied Volatility vs. Option Price:

Table 10.1
Stock/Ind
ex R-square P-value
0.10025804 0.00024233
NIFTY 8 1
BANKNIFT 0.29462313 3.03092E-
Y 8 11
0.18383666
PNB 5 0.00040798
0.03483552 0.15332123
SBI 3 3
0.24311813
RIL 3 0.00015185
0.13696332 0.00424417
ITC 9 2
0.15500953 0.00244540
BHEL 6 5
0.08395098 5.50625E-
ICICI 2 08
0.40151425 0.02125858
AIRTEL 1 4
0.11481554
AXIS 6 0.00866024

11. Conclusion

The implied volatility drops to zero as the option becomes too deep in the money

The implied volatility has a correlation somewhere between average to good with the
price of an underlying option.

The rising implied volatility is good for the buyer of an option as it increases the option
price and vice versa.

The implied volatility chases mean volatility.

The implied volatility drops down to zero few days before the option contract expiry.

Analysis Of Implied Volatility With Changes In Option Price Page 29

For an option buyer it is recommended to enter into an option contract when the implied
volatility is low and get out of the contract when the implied volatility is high.

Analysis Of Implied Volatility With Changes In Option Price Page 30

 12.References

BSE Website

NSE Website

Moneycontrol.com

Scholar.google.com

www.researchgate.com

www.psu.edu

Analysis Of Implied Volatility With Changes In Option Price Page 31