A Study on the Behaviour of Volatility of Nifty Index Options

An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell a basket of stocks at an agreed-upon price on or before a certain date. Index options are similar to other options contracts, where the underlying instruments are stock market indices. This study is an attempt to analyse the relationship between spot and options markets in order to find out whether there exists any lead-lag relationship between these two. The study focuses on the relationship between the NIFTY Index Options and the underlying stock index - NIFTY 50. The study mainly focuses on analysing the dynamic relationship between options and spot market volatilities in the NIFTY. The relationships such as long term, short term and causality between spot and options market volatilities are analysed with the help of various econometric models. This study intrepidly says that the relationship between the options and spot markets is so dynamic. It is seen that there is a very smooth way of passing information from the options market to spot market and both are highly linked.