Where IV comes from
An option's premium depends on the price, strike, days to expiry, interest rates — and how much the underlying is expected to move. All of these are known except the last one. Implied volatility is the expected movement that makes a pricing model (usually Black–Scholes) match the actual premium. It is quoted as an annual percentage.
IV and the expected move
A rough one-standard-deviation move over a period is: price × IV × √(days ÷ 365). For example, NIFTY at 22,500 with IV of 14% implies about 22,500 × 0.14 × √(7 ÷ 365) ≈ ±436 points over a week. Prices stay inside that range roughly two times out of three if the market moves as priced.
Why IV matters to option buyers and sellers
- Higher IV = more expensive options (both calls and puts), all else equal.
- IV usually rises before known events (results, budget, policy decisions) and around sharp falls.
- IV crush — after the event, IV often drops quickly, so option premiums can fall even if the price moves in the buyer's favour.
For the whole market's IV, see India VIX.