Options are derivative financial instruments, i.e. their price development depends on another instrument (underlying). In addition to the price development of the underlying, however, another factor has a very large influence on the option price: the implied volatility (English: Implied volatility) - briefly: IV. In this article you will learn what implied volatility is and how to analyze it in Trader Workstation (TWS).
What is implied volatility?
The implied volatility (IV) expresses the expected range of fluctuation of a market for a certain period and is calculated from the option prices of the underlying. If market participants expect a high volatility, the premiums of the options increase, resulting in an increase of the IV.
Difference to historical volatility
Implied volatility (IV) should not be confused with historical volatility (HV). While the IV is the expected variation of the future, the AGM is about the actual range of fluctuation of a market measured in the past.
The implied volatility of individual options
One of the premises or misconceptions of the Black-Scholes model was that the implied volatilities of options on an underlying were the same for different strike prices. However, after the 1987 stock market crash, market participants began to use options for hedging against falling prices (Put options) to pay higher amounts than for hedges against rising prices (Call options).
Since the implied volatility of an option is calculated using an option pricing model such as the Black-Scholes model from the option prices actually arrived at on the market, this leads to the fact that the implied volatilities are not uniformly distributed, but that different IVs may occur depending on the strike price. This phenomenon is referred to as "Volatility Skew" (volatility slope).
Volatility indices
When IV of a market is referred to, it usually does not mean that of a single option, but a kind of Average valuewhich is calculated from the individual implied volatilities of the various underlying prices.
This average value is mapped with so-called volatility indices. The best known volatility index is the CBOE Volatility Index - VIX for short - and is calculated from the option prices of S&P 500 index options with a maturity between 23 and 37 days.
A volatility index is also available for the DAX, which is VDAX-NEW. In addition, numerous other volatility indices are published for various markets.
In addition, a volatility index can be calculated for each underlying on which options are tradable. For futures options, for example, there are providers such as IVolatility or various providers of options software.
Implied volatility in the TWS
In Captrader's Trader Workstation (TWS) you have the possibility to display the IV for an underlying directly in the chart. (Right click à Chart Parameters à Option-Implied Volatility)
It is also possible to analyze the IV by clicking on "Analysis Tools à Option Analysis à Volatility over Time à Implied Volatility, by Maturity" in the menu to analyze the course of the IV for any underlying.
Analyze the development of the IV
Since the implied volatility one of the most important factors influencing the option price is, it is important to analyze it and arrive at an assessment of the development of IV. Since very high or very low volatility occurring at times tends to lead to its Mean value return, options traders like to buy options in a low volatility environment or sell options predominantly in a high IV environment.
Trade more complex Option strategiesconsisting of several Legs, it is equally necessary to know how the strategy reacts to changes in the IV or in which IV environment the best results can be expected with the strategy.
Options traders often compare the current IV with values from the past in order to estimate how implied volatility will develop in the medium term. The so-called IV Rank and the IV Percentile are suitable tools for the analysis.