What is implied volatility in options trading
Warrant: Implied volatility as the most important key figure
The implied volatility of warrants stands for the fluctuation range of the underlying asset within the price during the remaining term of the option.
In general, the following rule of thumb applies: A high value means high fluctuations. A lower one for the opposite.
Important: The implied volatility only indicates the range of price fluctuations, not their direction.
The implied volatility expresses the expectations of the market participants
The fact that implied volatility is used for warrants differs from the usual procedure.
This is because the historical fluctuation range is normally used to determine changes in value for certain periods of time.
For the warrant, however, the implied volatility is of interest. It expresses the CURRENTLY expected fluctuation strength of the underlying for the remaining term of the option.
What is the significance of the implied volatility for the warrant?
The price of the warrant is hugely affected by the volatility. If this has a high value and the banks expect high fluctuations accordingly, the price of the warrant is raised.
The current value is increased. The warrant is cheaper if the implied volatility is low.
The reasons for this: In the event of strong fluctuations in a share, the bank expects the price to move in a profitable direction for the holder of the warrant.
Because larger price fluctuations promise the investor better opportunities. The reason: the warrants gain in value when the fluctuations are strong.
Investors who keep quiet are also paying for the increasing risk in the form of premiums. Therefore, the bank increases the price of the warrant when there is high volatility.
In quieter phases on the stock market, option buyers would not be willing to pay high prices.
That is why the banks adjust the prices downwards in these phases - i.e. when the volatility value is low. In these phases, investors are already satisfied with low premiums.
What does implicit mean?
The implied volatility of a warrant does not express anything other than market expectations.
In this context, implicit means that the expected fluctuations are already included in the warrant.
Which warrants in the crisis?
In times of crisis, you should look closely at implied volatility when considering investing in options.
Often the implied volatilities are extremely high and the warrants are very expensive. Then you could suffer from falling volatility after the investment and receive significantly lower premiums than previously calculated.
In times of crisis, you should therefore rely on warrants that have a short term and are deep in the money. Here is an explanatory example: A call on the BSP share is “in the money” if the current price of the share is above the base price of the call.
With the assumed base price of 50 euros, this call is always “in the money” if the price of the share is higher than 50 euros.
The difference between the base price of the call and the share price is called intrinsic value. A high intrinsic value and a low time value are recommended in times of crisis because these warrants do not react as strongly to changes in volatility.
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