What implied volatility is
Take a live premium, plug it into the pricing model, and solve backwards for the one input you cannot observe. The result is implied volatility: the annualised standard deviation of returns the market is charging for. An IV of 12% on NIFTY says the market is pricing moves consistent with the index wandering ±12% over a year — which, scaled by √time, is about ±0.75% a day or ±1.7% a week. IV is not a forecast of direction. It is the price of movement.
Implied versus realised
Realised (historical) volatility is what the underlying actually did — measured from past returns. IV is what options say it will do. The gap between them is the whole option-writing business: on average, across years and markets, IV runs a little above subsequent realised volatility. Writers are paid a premium for absorbing the risk that it won't. When realised turns out higher than implied — a crash, a shock result — writers lose, sometimes catastrophically; that is the tail they were paid for.
Practical version: if NIFTY has been moving ±80 points a day and the straddle prices ±180 for the week, options are rich relative to recent behaviour. If it has been moving ±200 a day and the straddle prices ±180, they are cheap. Neither guarantees anything, but it tells you which side has the odds.
India VIX
India VIX is NSE's index of NIFTY 30-day implied volatility, computed from the option chain. It is the quickest read on whether options are expensive today. Typical ranges: low teens in calm markets, 20s in nervous ones, 30+ in crises. Watch it on the live tape above every chapter. Two rules of thumb: a rising VIX makes every long option position worth more and every short one worth less, regardless of direction; and VIX tends to spike fast and fall slowly, so the best time to sell premium is right after a spike, the best time to buy is deep in a calm.
IV percentile and rank
A 15% IV is high for NIFTY and absurdly low for a small-cap stock. To compare, use IV percentile: the fraction of the past year's days on which IV was lower than today's. At the 90th percentile, options are expensive by the underlying's own standards — a writer's environment. At the 10th, cheap — a buyer's. This is the single best filter for “what kind of strategy should I even be considering today?”
Skew and the smile
If the pricing model were literally true, every strike would show the same IV. It doesn't, because markets know that crashes are faster and bigger than rallies. Out-of-the-money puts therefore trade at higher IV than equidistant calls: the skew. Plotted across strikes the IVs form a tilted smile — the live block above. What it tells you:
- A steep skew means crash protection is expensive: put buyers are paying up. Strategies that sell downside puts (bull put spreads, put ratio spreads) are collecting that premium.
- A flattening skew after a fall often marks exhaustion: the hedgers have hedged.
- On stocks before results, the smile bulges symmetrically — pure event uncertainty.
Vol crush: the event trap
Before a budget, an RBI decision, a company's results, IV rises: uncertainty is high and everyone wants optionality. The moment the news is out, uncertainty collapses and IV with it — often by a third in minutes. An option bought the day before at 40% IV is repriced at 25% after, and can lose money even if the news moved the stock in your favour: delta gave, vega took more. This is the most reliably expensive lesson in retail options. If you want to trade an event, either buy well before IV builds, or structure the trade so vega is neutral (a spread), or be the seller of the crush — with defined risk, because “the move was bigger than implied” is the other way events resolve.
Next: the mechanics that turn a paper P&L into real money — expiry and settlement.