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Finance GlossaryImplied Volatility In Options
Implied Volatility In Options
Definition of Implied Volatility In Options
Implied volatility in options is a measure of the expected volatility of the underlying stock over the period of the options tenure. You could say that an option’s premium is related to the implied volatility - the change in the underlying share’s value over time affects the share price. In fact, the implied volatility rises when the options premium rises.
Related Terms
Go Public
To “go public” or going public means to get listed on the stock market by launching an Initial Public Offering (IPO). The act of going public involves receiving approval from existing stakeholders to launch an IPO, the price of which is decided by two methods:
- Book Building
- Fixed price
Once the price of the IPO is decided, the shares are offered to the public on the primary market. Not everyone who applies to an IPO may get shares - the system works on the basis of allotment. After the shares are issued, the company is said to move from the “go public” stage to the publicly traded company stage.
Contract Note
A contract note is a compilation of all the trades and transactions made through a stockbroker on a stock exchange. It is a legal record that all recognized stockbrokers must send to traders and investors at the end of each trading day.
Interest Rate Risk
Interest rate risk refers to the probable decline in the value of a fixed income security because of a fluctuation in the interest rate. Fixed income securities lose value when interest rates rise whereas a bond or other debt instruments become more valuable when interest rates fall. Equity shares and securities do not carry interest rate risk.
Comparable Company Analysis
Comparable Company Analysis (CCA) is a method used to evaluate a company’s value by comparing its essential metrics like EBIT, EBITA, and more with other companies.
The underlying assumption of CCA or “Comps” is that publicly traded companies from the same sector or industry will have similar metrics that are comparable.
The underlying assumption of CCA or “Comps” is that publicly traded companies from the same sector or industry will have similar metrics that are comparable.
Anaume Pattern
An Anaume Pattern can be seen when a gap is filled after a change in the direction of a security or market’s price.
Anaume Patterns are gap-filling patterns that can signal the reversal of a bearish trend, which is nothing but a potential onset of a bullish trend, when used in conjunction with other patterns.
Anaume Patterns are also known as exception exhaustion patterns.
Anaume Patterns are gap-filling patterns that can signal the reversal of a bearish trend, which is nothing but a potential onset of a bullish trend, when used in conjunction with other patterns.
Anaume Patterns are also known as exception exhaustion patterns.
Fair Value
The fair value of a stock, product, or service is the price at which the buyer and seller willingly agree on without being on the losing end of the deal. Think of fair value as a win-win situation for both parties, assuming that all conditions are normal.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
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