This guide explains how IV is calculated, how IV rank and IV percentile work, worked examples, how IV relates to India VIX and historical volatility, and how to use IV in trading rules.
How implied volatility is calculated
An option's price depends on the underlying price, strike, time, interest rate and volatility. All except volatility are known. The calculator works backwards: it searches for the volatility that makes the model price equal to the market price. That volatility is the IV.
For example, if a Nifty ATM call trades at the price the Black–Scholes model gives at 14% volatility, its IV is 14%. If the same option traded higher, its IV would be higher. See the Black-Scholes calculator for how the model works.
What IV tells you
- High IV: options are expensive because the market expects large moves. Common before events.
- Low IV: options are cheap because the market expects calm.
IV is quoted as an annual percentage. At 14% IV, the model's one standard deviation move for Nifty at 25,000 is about 183 points in a day and about 635 points over 12 days.
IV rank
IV rank shows where today's IV sits between its high and low over a past period, usually a year:
IV rank = (current IV − lowest IV) ÷ (highest IV − lowest IV) × 100
Example. Over the past year, an option's IV ranged from 11% to 27%. Today it is 18%.
IV rank = (18 − 11) ÷ (27 − 11) × 100 = 43.75
Today's IV is a little below the middle of its yearly range.
IV percentile
IV percentile shows the share of days in the past period when IV was lower than today:
IV percentile = days with IV below today's ÷ total days × 100
If IV was below 18% on 150 of the last 250 trading days, the IV percentile is 60.
Why the two can differ
IV rank uses only the high and low, so one extreme spike can distort it. IV percentile uses every day, so it reflects how often IV has been this high. In the example, a single spike to 27% makes the IV rank look moderate, while the percentile shows today's IV is higher than on most days.
IV, India VIX and historical volatility
- India VIX measures the 30-day volatility implied by Nifty option prices. It is a good guide to the general level of index IV, but each strike and expiry has its own IV.
- Historical volatility measures how much the underlying actually moved over a past period. Comparing IV with historical volatility shows whether options are priced for more or less movement than recent history. See the historical volatility calculator.
Skew and term structure
IV is not the same for every option:
- Skew: out-of-the-money puts on Indian indices usually trade at higher IV than out-of-the-money calls the same distance away, reflecting demand for protection against falls.
- Term structure: near-term options can have higher or lower IV than longer-dated ones. Before an event, the expiry just after it often has the highest IV.
When you compare IV over time, compare like with like: the same moneyness and a similar time to expiry.
Using IV in trading rules
- Sellers often prefer high IV rank or percentile, when premiums are rich. See option selling strategies.
- Buyers often prefer low IV, when options are cheap. See the option buying strategy.
- Event filters: IV usually rises before events and falls after them. See IV crush.
- Strike selection: with high IV, the same delta sits further from the market, which changes how wide a strangle or condor is.
A rule might be: sell a strangle only when IV percentile is above 50, and buy a straddle only when it is below 30. Test any such rule on historical IV data before trading it.
Limits of IV measures
- High IV can rise further. Selling because IV is high does not protect against a larger move.
- History may not repeat. A calm year produces a low range, making moderate IV look high.
- Data quality. IV calculated from illiquid options can be noisy. Prefer near-the-money options.
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Frequently asked questions
What is implied volatility in options?
The volatility implied by an option's market price, showing how much movement the market expects.
What is a good IV rank for selling options?
Many sellers prefer IV rank or percentile above 50, when premiums are relatively high. Higher IV also means the market expects larger moves, so risk is higher too.
What is the difference between IV rank and IV percentile?
IV rank compares today's IV with the year's high and low. IV percentile shows how many days in the year had lower IV than today.
Is India VIX the same as implied volatility?
India VIX is an index of implied volatility for Nifty options over 30 days. Individual options have their own IVs, which can differ.
Sources
- NSE: India VIX
- Natenberg, S. (2014). Option Volatility and Pricing. McGraw-Hill
- Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654