What it is

Historical volatility measures how much a price has moved. Implied volatility (IV) is the volatility that makes an option-pricing model, such as Black-Scholes, match the option's market price. It is the market's guess about the future, and it rises when people pay up for protection.

From IV to a daily move

IV is quoted as a yearly percentage. To convert, divide by the square root of the number of trading days: daily move ≈ IV ÷ √252 ≈ IV ÷ 16. With India VIX at 16, Nifty is priced to move about 1% on a typical day, and about 2.2% over a typical week (16 × √5 ÷ √252).

IV crush

Before scheduled events (results, the budget, policy meetings, elections) IV usually rises because the outcome is uncertain. Once the event passes, IV often drops sharply. Option buyers can lose money even when they guess the direction right, because the fall in IV lowers the price.

IV vs realised volatility

When IV is well above the volatility the market actually delivers, options are expensive, which suits sellers. When IV is below it, options are cheap. Comparing the two over time is the core of volatility trading.

Common mistakes

• Reading high VIX as a signal that the market will fall. It signals bigger expected moves in either direction.
• Comparing IV of different expiries without adjusting for time.
• Ignoring that IV differs by strike (the volatility smile).