Two options on the same index with the same strike and expiry can cost very different amounts on different days, even with the index at the same level. The difference is usually implied volatility: the market's collective estimate of how much the index is likely to move.
Historical vs implied volatility
- Historical (realised) volatility measures how much the index actually moved in the past, from its daily returns.
- Implied volatility (IV) is backed out of option prices: it is the volatility you would have to put into a pricing model to get the premium the market is paying today.
- Both are quoted as an annualised percentage. An IV of 14% means the market is pricing moves consistent with an annualised standard deviation of about 14%.
A rough rule of thumb converts annual IV into a daily move: divide by about 16 (the square root of the number of trading days in a year). At an IV of 14%, that is a typical daily move of a little under 0.9%. On an index "at 25,000" that is about 220 points. It is a statistical yardstick, not a forecast for any particular day.
How IV moves the premium
Higher IV means a larger chance of a big move, which is worth more to an option buyer, so both calls and puts get more expensive. In our illustrative example (Nifty "at 25,000", 25,000 CE, 7 days to expiry), the premium is about ₹209.21 at 14% IV and ₹222.99 at 15% IV: a change of ₹13.78 per unit, or ₹895 per lot. That sensitivity is the option's vega.
About these numbers
All numbers here are illustrative: Nifty "at 25,000", implied volatility 14%, interest rate 6.5%, computed with the Black–Scholes model. They are not current market prices.
IV crush
Before a scheduled event such as the Union Budget, an RBI policy decision, an election result or a company's quarterly results (for stock options), IV often rises because a big move is possible. Once the event has passed, the uncertainty is gone and IV tends to fall back. An option bought before the event can lose value even if the index moves in the direction the buyer wanted, because the fall in IV outweighs the gain from the move. Traders call this IV crush.
IV is different for every strike
The NSE option chain shows an IV for every strike, and they are not equal. On Indian index options, out-of-the-money puts often trade at a higher IV than out-of-the-money calls, because protection against a fall is in demand. Plotted across strikes, this is called the volatility skew or smile. It means "the IV" of an index is a simplification; compare like with like.
What India VIX is
India VIX is a volatility index calculated by NSE from the order book of Nifty 50 options. It uses a method adapted from the CBOE VIX: the best bid and ask quotes of near and next-month Nifty options across strikes are combined into one number, the market's expected annualised volatility of the Nifty over the next 30 calendar days. NSE computes and publishes it in real time during the trading session.
- It is expressed as an annualised percentage, like IV. A VIX of 15 implies the market is pricing an annualised volatility of about 15% for the next month.
- It tends to rise when the market is anxious, often during sharp falls, which is why it is sometimes called a fear gauge.
- It is not a price you can buy. It is an index computed from option prices; it says nothing about direction.
Reading India VIX sensibly
| It tells you | It does not tell you |
|---|---|
| How expensive Nifty options are overall, compared with other times | Whether the index will go up or down |
| Roughly how large a move the market is pricing over the next month | The IV of a specific strike or of a weekly contract |
| How sentiment about risk has changed over days or weeks | Whether options are "cheap" relative to what will actually happen |
High or low VIX is not a signal
A high VIX means options are expensive because the market expects big moves; it can stay high or rise further. A low VIX means options are cheap because the market expects calm; calm can end abruptly. Neither is a reason by itself to buy or sell options.
Where to find IV and India VIX
NSE's option chain shows the IV of each strike for calls and puts. India VIX is published on the NSE website and shown on most broker apps alongside the indices.
Examples use illustrative values, not current market data. This is general education, not investment advice.