"Volatility Crush and Option Premiums During Market Events: What Traders Need to Know" from Sahaj Agarwal, Head of Derivatives Research, Kotak Securities:
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Below the Quote on "Volatility Crush and Option Premiums During Market Events: What Traders Need to Know" from Sahaj Agarwal, Head of Derivatives Research, Kotak Securities
This week we expect a reduction in volatility, technically referred to as a volatility crush. Typically, a market-impacting event leads to an irrational increase in implied volatilities (IVs) of options. This primarily occurs due to the fear and uncertainty surrounding the event's outcome.
High implied volatilities are attractive for option sellers and provide momentum for option buyers. The transition back to a low IV regime is often drastic, making risk management crucial. As the event progresses and certainty sets in, IVs collapse and return to normal levels.
To put things in perspective, India VIX made a low of 10 and is currently trading around the 24 mark, having peaked at 26. The previous 15-month average for India VIX is observed at 13-15. Therefore, expect an IV crash and a sudden drop in options premiums, along with the impact of the underlying movement, referred to as delta.
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