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Optionalysis: Implied Volatilities Show What Is Better To Buy


Optionalysis: Implied Volatilities Show What Is Better To Buy

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Here’s a quick note before the close to look at option implied volatilities. While the VIX only tells us what’s happening in the Nifty overall, what we really need to look at is which options to trade.


The May options have a far greater implied volatility than the June options. As the following two graphs show.image



If you’re buying options, you are likely to do better buying options expiring in June because you pay relatively lesser.

What are we doing with options?

We got very lucky last week. Our strategy was to trade options on the short side, to eat premium, which we did till thursday. Having no appetite to stay short options through the weekend, and watching the Nifty retrace back to 6700 (from where it had bounced three times earlier) we exited our short option positions. The strategy then was to go long if the market rebounded on Friday.


We bought calls on Friday morning and those have nearly doubled in value as the markets have gone up 5% since then. We are now out of nearly all positions, with the exit polls coming in today evening. Our strategy is to:

a) not be naked short options (spreads, butterflies and condors are fine)

b) trade very short term since the volatilities are so high.

c) Look at stock specific option choices, (as in, not only the Nifty)

We have placed bids for a few puts. However this is a very high risk strategy designed to trade for a retracement to the 20 period moving average (on the hourly)

We’ll return soon with a piece on the Put-Call Ratio, which is showing that there is substantially higher interest in call options than in puts. If the crowd’s betting on the market going up, is it a good trend reversal indicator?

Note: Watch out for the exit polls today. Big event risk!

Optionalysis: Implied Volatilities Show What Is Better To Buy


Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.




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