Rajandran R FollowCreator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

In finance, the volatility smile is a long-observed pattern in which at-the-money options tend to have lower implied volatilities than in- or out-of-the-money options. The pattern displays different characteristics for different markets and results from the probability of extreme moves

The Above video explains a plot of implied volatility (i.e., the volatility that forces the BSM model option price to equal the observed market price) against strike price. The smile is proof the model is imprecise (incorrect in some assumption); e.g., returns are not lognormally distributed

When implied volatility is plotted against strike price, the resulting graph is typically downward sloping for equity markets, or valley-shaped for currency markets. For markets where the graph is downward sloping, such as for equity options, the term “volatility skew” is often used. For other markets, such as FX options or equity index options, where the typical graph turns up at either end, the more familiar term “volatility smile” is used. For example, the implied volatility for upside (i.e. high strike) equity options is typically lower than for at-the-money equity options. However, the implied volatilities of options on foreign exchange contracts tend to rise in both the downside and upside directions. In equity markets, a small tilted smile is often observed near the money as a kink in the general downward sloping implicit volatility graph. Sometimes the term “smirk” is used to describe a skewed smile.

Chart shown above is the Volatility smile plot for Suzlon Energy Limited for both the call and put option for Aug 2010 options series

Related

Rajandran R FollowCreator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

In an unexpected turn of events, the Indian stock market experienced a dramatic crash today following the announcement of the Lok Sabha election results....

hi sir ,

can stock options be traded on Implied volatility only , any free software for IV and volatility smile .

tx in adv.

From option oracle software you can get the implied volatility and volatility smile for any kind of stocks.

Implied volatility is one of the factor needs to be seen while trading in stock option

HELLO SIRJI ,

PLS GIVE NICE INDICATOR FOR INTRADAY IN AMIBROKER…….

THANKS

sir ,

any software that gives good buy /sell signals real time for stocks. tx in adv.

sir ,

1 more thing , i want to trade in oil etf , where to go ? tx in adv.