Implied Volatility of Nifty has hit a new low of almost 13%, which is also much lower than the actual volatility of Nifty.
Does that mean, we are expecting a lower volatility in future ?
To answer this question, we will look at some facts
a) Implied Volatility is lesser than realized volatility.
b) IV of far Month Nifty and Leaps is higher than near month ? Mostly it is the reverse.
c) IV of Underlying stocks have not fallen to same extent.
d) Intra-day volatility of Nifty has fallen recently.
e) Volumes in Nifty options have gone up
f) Volatility in Mid Cap Speculative Stocks have gone up.
g) There are movements in Nifty Underlying, but Volatility in nifty is in tight band.
h) There is a holiday season ahead
i) Liquidity is also coming from SGX nifty
I feel that fall in IV is more to do with traders moving away from trading in Nifty. There is excess cost associated in Nifty trading compared to its intra-day volatility. (As bunch of Nifty volumes are generated by intra-day trades). Traders seems to have migrated to Mid Caps.Also FII seems to be more comfortable trading on SGX Nifty (Volumes have moved up over there)
But There seems to be opportunity to trade in Nifty :
a) If you just want to bet on Direction, Calls or Puts are comparatively cheaper than realized volatility.
b) Taking a long bet on Nifty straddle (Buy Call and Put simultaneously of same strike) is also good idea , As there are 35 day for next expiration, wherein we can expect nifty to move in either ways in these time.
c) If you are a delta trader, Long gamma will be helpful as impact of Theta will be less compared to money earned in managing Nifty.(But take care of STT)
This is not the recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.
I welcome your critical comments and suggestions.