Volatility is an analysis tool that evaluates the risk associated with individual stock, ETF, index or investment themes. It allows investors to compare stocks, ETFs, indices or investment themes by volatility, to determine the level of risk involved in each. It can also be used for identifying the ideal derivatives strategy for leveraging or hedging.
In the chart shown below, one can notice that ITC and the NIFTY-50 index have both experienced a decline in volatility, over the past three months, ITC’s volatility has significantly decreased from 17th March 2023 to 8th May 2023. Similarly, the NIFTY-50 index has also witnessed a decrease in volatility from 15th March 2023 to 6th June 2023.
Based on this information, investors who are trading in ITC derivatives may consider implementing the ‘Long Strangle’ options strategy. This strategy aims to generate better risk-adjusted returns for investors.
Understanding current Volatility, trend of volatility and trend of instrument is extremely important for derivatives investing. For example, when volatility is close to historical lows, investors can prefer long gamma strategies while when volatility is closer to historical highs, investors can consider short gamma strategies.
Follow these easy steps to use Alpha Builder’s tool “Volatility” to compare symbols by risk associated:
1. On the home-page, click “Alpha Builder” or select sub-menu item “ALPHA BUILDER” under the “TOOLS” head of the “PRODUCTS” menu.
2. Scroll down the page and click on “Volatility“.
3. The chart displays the volatility of NIFTY-50 by default.
4. Click on the left-side text-box with text as “Symbol 1“, type the symbol and click on one of the presented options.
5. Now click on the hand lens icon next to the text-box.
6. The comparative volatility of the selected symbol with NIFTY-50 will be displayed chartically.
7. Click on the right-side text-box with text as “Symbol 2“, type the symbol and click on one of the presented options.
8. Now click on the hand lens icon next to the text-box.
9. The comparative volatility of the two selected symbols with NIFTY-50 will be displayed chartically.