{"id":1981081,"date":"2014-04-19T19:00:38","date_gmt":"2014-04-19T13:30:38","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=1981081"},"modified":"2014-09-09T12:27:13","modified_gmt":"2014-09-09T06:57:13","slug":"understanding-nifty-volatility","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2014\/04\/19\/understanding-nifty-volatility\/","title":{"rendered":"Understanding Nifty Volatility"},"content":{"rendered":"

Definition<\/h3>\n

Volatility (\u03c3) is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices. There are different ways of calculating volatility. At StockViz, we use Yang Zhang Volatility<\/a>.<\/p>\n

\u03c3 is one of the biggest contributor of option premiums. Understanding its true nature will help you trade it better.<\/p>\n

Volatility spikes<\/h3>\n

Observe the volatility spikes since 2005. Even though the average is around 0.3, its not uncommon to have huge swings.<\/p>\n

\"nifty-volatility\"<\/a><\/p>\n

Fat tails abound<\/h3>\n

\"nifty-volatility-10-histogram\"<\/a><\/p>\n

\"nifty-volatility-20-histogram\"<\/a><\/p>\n

\"nifty-volatility-30-histogram\"<\/a><\/p>\n

\"nifty-volatility-50-histogram\"<\/a><\/p>\n

Trading strategy<\/h3>\n

Always try to be on the long-side of volatility. It might be tempting, while trading options, to try and clip the carry on \u03b8-decay. But you should always be aware of the fat-tails of volatility that can crush many months of carry P&L overnight.<\/p>\n

Related articles<\/h6>\n