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Charts & Analysis

Option Pricing and the VIX: MV Chronicle

In the latest MarketVision Chronicle (Needs free registration) we speak of Option Pricing and the VIX:

On popular demand, we bring in an introduction to option pricing – a primer of sorts – and an explanation of VIX (the volatility index). Followed by an analysis of where we are right now. And of course, all at Marketvision.  Enjoy the IPL final as it ends a very light week in terms of volumes and data on the markets.

An Introduction to Option Pricing and the VIX


The Vix is an interesting index – a volatility index that determines what option prices imply that our volatility is. A quick primer: Options give a buyer the right, but not the obligation to buy or sell a stock or index at a given price (“Strike price”) at or upto a given day (“Expiry Date”). Call options are when you get the right to buy and put options, to sell.

For example, a Nifty 5400 call option expiring June 30 (In India, they usually expire on the last Thursday of the month) was trading at Rs. 66 on Thursday, when the Nifty was at 5415. That means someone was willing to pay Rs. 66 to be able to buy the Nifty at 5500 till June 30. So his break even price is Rs. 5566.

(Note: Options are bought and sold before the “Expiry date”. You can buy Jun 30 options today at 66, and sell them tomorrow at 85, and realize the profit. You don’t have to wait till expiry. Who’s on the other side? Other people, who have the opposite view.)

But why 66? Since the Nifty is at 5415 today, how does he come about to the figure of 66 rupees? Why does it go up to 85 when the Nifty goes up to 5450?

There are many answers, but this has been studied since the 60s. Fischer Black and Myron Scholes eventually created a valuation method for options that is called the Black Scholes method. I won’t go into the details, but you can get to the price using these parameters:
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And if you register, the next one’s will be in the email this Saturday. And then, every Saturday. Cheers!