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Implied Volatility Gap Between Call & Put Shrinking

Author: Dhirender Singh Bisht/Wednesday, October 14, 2020/Categories: Exclusive

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Implied Volatility Gap Between Call & Put Shrinking

In continuation with last week rally, the NSE Nifty was able to trade above 12,000 level and trading around that level. The rally was supported by IT stocks whereas correction was seen in media index. The week-on-week option pain is shifting upwards indicating the market is in grip of bulls. Call writers in current week are active at 12,000 and 12,500 strike, whereas on Put side at 11,800 and 11,700 strikes. On monthly expiry, the option writers are active at 12,500 strike Call and 11,500 strike Put. The VIX is trading in a range of 18 to 22 and remain sideways for upcoming sessions. The Implied Volatility (IV) gap between Call and Put now shrinking as compared to last week, which indicates both Call and Put writers are now going to be active which leads the market to move sideways. 

Generally this is normal phenomenon, but when the spread between Call Implied Volatility and Put Implied Volatility increases then there is a clear opportunity for option sellers to take a bet on either side. The Nifty straddle (October 15 expiry) on Tuesday closed at 162 level higher than the previous week indicates that the option seller are comfortable in the price movement of +/-162 from current level. These are the levels where the option sellers are comfortable on their sold position in straddle. The option pain for Nifty in current week and next week is at 11,900 level whereas for monthly is at 11,600. The option pain for Bank Nifty in current week and next week is at 23,500 level whereas for monthly is at 23,000. Going forward, the market is likely to take support around 11,850 and on upside 12,000 will act as resistance. Any breakout of resistance can make market to test 12,200 level. The stock-specific movement can be expected with upward biasness.

The writer is a senior research analyst (derivatives) at SMC Global Securities Ltd

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