Implied Volatility Changes
Sometimes when a trader seeks to exploit a stock’s expected price decline and sells an overpriced call, the underlying declines as expected but the option price does not. This happens because the implied volatility of the option has increased over the course of the price decline of the underlying.
This is common in stock and index options. When price declines, implied volatility tends to increase, and when price increases, implied volatility tends to fall. With futures options the opposite holds true: When the price of the underlying rises the implied volatility of the options tends to increase and when the price of the underlying falls the implied volatility tends to decrease.
You can use these characteristics to your advantage. First, if you seek to exploit a decrease in the price of an underlying stock or index, you should buy a put, which will likely gain a little more than it should if the underlying does indeed decline. (Another reason, of course, is the risk involved in selling a naked option).
However, if the underlying is a futures contract, you would expect the implied volatility to decline if the underlying declined. So, you could only gain additional benefit from this effect if you sold a call. Again, selling a naked call is risky, and you should look for ways to hedge this position if you choose to take it.
The analysis of implied volatility, like the analysis of volatility itself, is complicated and needs a much longer treatment than I can give in these commentaries, so if you do not have the tools to make these analyses you should just stick to the general principles I mentioned in the second paragraph.
In line with this, the average ratio of all stocks in the Pisani 250 rose to 101% with today’s market decline.