In SignalPlus Toolkit, you will find a series of advanced tools to display volatility related information from different angles, under the Volatility module. And we will review them one by one.
As discussed in some of our other articles, implied volatility projects the likelihood of future price changes in a given asset. Among the 4 factors (moneyness, time to expiry, and interest rate, implied volatility) that affect option pricing, IV (implied volatility) is the only subjective component that can't be observed directly. Given an option price at a specific moment, as the other 3 objective factors are known, it is fairly easy to derive IV from option price using the Black-Scholes Model.
The benefit of using IV instead of dollar price to compare different options is evident - it is a standardized unit of measure that can be applied across different strike prices, expiration dates, and even underlying assets.
In a word, IV is one of the most important measures for options traders to gauge the market sentiment and we want to use IV to help us find hidden opportunities or manage upcoming risks.
USD price is translated to IV for analytic purpose
The term structure of IV describes the pattern of options with the same delta exposure but different maturities. By comparing term structures, investors can visualize how option IV will change as time elapses. As per the chart below, longer tenor options currently have higher IV than shorter tenor options, implying that longer tenor options take more uncertainties of the future into consideration.
By default, our system displays a standardized set of strikes. 25D Put represents a Put whose strike has been chosen such that the delta is -25%; 25D Call represents a Call whose strike has been chosen such that the delta is 25%. You can also choose a different delta representation for your purpose on the left side.
By observing the IV gap between different delta, investors can also gauge RR IV. RR is a portfolio of long call and short put at the same delta, which is commonly used for gauging market emotion. When call iv-put iv is negative, investors are trading put for downside protection. When call iv-put iv is positive, investors are trading call chasing up trend.
When we plot IV of various options with the same underlying asset and same expiration date but different strike prices, we often see a U-shape (or a smile) towards the polar ends of the curve. This means volatility increases as the option becomes increasingly in the money or out of the money.
