What is Implied Volatility (IV)?
Implied volatility (IV) is the expected future volatility of the underlying that is implied by an option's market price, expressed as an annualised percentage. It is worked out backwards from the premium using a pricing model such as Black-Scholes.
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What is IV in an option chain?
It is a column showing, for each strike, the volatility the market is pricing into that option. A NIFTY option with IV of 14 is priced as if NIFTY will move about 14% a year, which works out to roughly 0.9% a day. Higher IV means a more expensive option for the same strike and expiry.
Why does IV rise before events?
Results, RBI policy, the Union Budget and election counting can all move the market sharply, so buyers pay more for options before them. After the event the uncertainty is gone and IV drops, often by several points in minutes. That drop is called IV crush, and it is why an option buyer can be right on direction and still lose money.
What is the link between IV and India VIX?
India VIX is calculated from the prices of NIFTY options, so it is a summary of NIFTY's implied volatility for the near term. When VIX jumps, NIFTY option IVs jump with it.
Why is IV different for each strike?
Out-of-the-money puts usually carry higher IV than calls at the same distance, because traders pay up for crash protection. Plotted across strikes this forms a curve called the skew. Comparing IVs across strikes shows where options are cheap or expensive relative to each other.
How does AOC show IV?
The first column on each side of the AOC option chain shows the strike's IV with its delta underneath, and the Greeks table below the chain sums IV and the Greeks for calls and puts.
