when there’s a deliberate occasion like RBI statement, FOMC meeting, earnings end result, predominant political events like Election effects, BR go out the form of situations options rate has a tendency to transport higher because the implied volatility of the options receives a ramp up before this type of binary occasion. The cause for such ramp up in alternative volatility is the investors getting into hedging mode because of the uncertainty of the occasion and speculators having a bet at the destiny directional circulate which reasons the Implied volatility to spike up.
as soon as the Binary occasion is over, markets are back to actuality which makes buyers to take away their hedges and that results in IV weigh down aka volatility overwhelms put up the occasion assertion. The expected marketplace motion range on any binary occasion days is called predicted circulate. So the way to predict the range for any Binary event?
There are basically 3 approaches to calculating the expected circulate one is the use of ATM Straddle and the every other technique is using Implied Volatility.
Method 1 – OAWeb (Easiest)
These easiest ways without doing any calculation is log in to OA web (Option Action) -> Goto Option Chain -> Fetch the Option Chain for the Required symbol and it automatically shows the Stock/Index Range for the month/ Binary Event. Which you can use this information for further processing in your trading strategies.
Method 2 – ATM Straddles
For those who don’t have access to Option action OAweb still, the calculation is easier. It can be calculated from the 85% of the current month ATM Straddle cost and divide by the underlying stock price to get the expected value in percentage terms as shown in the above figure.
For Example Current Nifty Spot Price is 9674.80 so the ATM strike price is 9650.
Now the cost of the ATM straddle is = Cost of 9650CE + Cost of 9650PE = 106.15 + 76 = 182.91 (Expected Range in terms of points)
Expected Value = (182.91 * 85)/9674.80 = +/- 1.606 (Expected Range in terms of percentage)
Method 3 – Implied Volatility
Another way to measure the expected range is using the implied volatility (IV) or VIX as a proxy instead of IV. The formula to calculate the Expected value using IV is shown below.
where DTE = Days to Expiration (calculated in terms of calendar days)
Let’s take an example. Current Nifty value is 9674.80 and the Average of ATM IV of both 9650CE and PE is 9.285. And total days for June contract to expire is 25 days.
Hence Expected value = 9674.80 * 9.285/100 * Square root ( 24/365 ) = 1064.228 * 0.2617 = +/- 235.08 points
Now once you computed the Expected move you can play a structural option strategic play based on the current market conditions and the prevailing volatility.