In trading standard equity options and standard futures options it is important to keep price - volatility (pv) relationships in mind. Typically equities and index futures have “negative” p-v (as price rises, volatility falls) and commodity futures have “positive” p-v (as price rises, volatility rises). Are these relationships the same for nadex options? Can you classify the following as positive or negative relationships by type of instrument:
- Stock Index options - positive or negative
- Energy commodities - positive or negative
- Precious metals commodities - positive or negative
- Agricultural commodities - positive or negative
- Forex Pairs with USD as base (e.g. GBPUSD)
- Forex Pairs with non-USD base (e.g. USDJPY, USDCHF)
All of the above would be classical p-v relationships which is a necessary guide. Is there a resource to identify any changes in these relationships as they arise (e.g. special conditions giving different skew relationships). Thank you!
Well the saying goes the bull goes up the stairs and the bear goes out the window can apply to indices. As markets have been known to fall faster than they rise. The inverse could be said on commodities is not nearly as consistent…ie corn had a limit move down in the past couple weeks. On forex one is long and one is short whether you buy or sell so it does not apply at all.
Volatility means movement
Implied volatilty means expected movement. I suspect here you mean more of the implied volatility. As fear of movement means more optiosn are purchased to hedge positions. Since the market in general is bullish it hedges positions when the market falls causing a spike in option buying. This spike increases implied volatility.
Vega is the component (greek) that is how a 1% change in IV effects an options price.
However, vega is larger the further you are from expiration as there is mmore time for a move. So a short dated option (ie friday expiration etc…nadex options) will barely see any impact of IV as the vega is almost non-existent.
You are most likely to see a spike in IV right before a news event regardless of direction. IF there is a massive move (like how USD/JPY had a 5 deviation move the other day) will cause IV to rise and stay increased for several days pushing binaries closer to a $50 price further out and making premium more expensive in spreads that are closer to the floor/ceiling. Beyond that thought he buy low volatilty sell high volatility to make money ie on puts when the market falls is not really applicable as that is more over days not intraday. (the one consistent exception on intraday would be right after an earnings release IV can be ****ed out ofa stock option and this is called a volatility crush).
So in summary the PV (price volatility) relationship is not a big factor to be concerned with when trading Nadex options except as in relation to news reports or with exceptionally large fast moves.
Very helpful - thank you.
