Markets have strange ways of giving surprises.
Yesterday, when RBI policy was to be announced, any expert trader will expect Implied Volatility of options to drop after the event.
But what happened ?
Implied Volatility went up !
Why so ?
There was nothing bad in the RBI policy. In fact it was much better than expectation also. But since markets went down, Implied Volatility went up. And markets went down substantially, almost by 2 %. So, whenever markets go down, IVs always increase.
In this case two things worked simultaneously.
Local factor was RBI policy, but globally, markets were in a pretty bad fall.
Hence, once the local factor was played out, global factor dominated due to which markets fell and IVs increased.
But see what happened today – 6 th April.
Markets were more or less stable, but IVs crashed by almost 3 %.
So, option writers , who sold options were not in profit yesterday(not in loss either), but today they were in profits.
Markets will surprise in different ways, but patience and sticking to basics is the key.
Sometimes, holding your hedged position for an extra day can do wonders.
Again, the basic phenomenon we must keep in mind always:- –
SELL ON HIGH IVs, BUY ON LOW IVs