Vega and the IV crush
How implied volatility moves option prices, why it collapses after events, and how long straddles have fared at different IV ranks.
Implied volatility (IV) is the volatility that makes a pricing model agree with the market price. When IV rises, every option on the underlying gets more expensive; vega is the change in an option's price for a one-point change in IV.
Ahead of scheduled events — company results, policy announcements, the Union Budget, election results — IV builds up because a large move is possible. Once the news is out, the uncertainty is gone and IV usually drops sharply. That drop is the IV crush: a buyer can be right about the direction and still lose if the move is smaller than the one the IV priced.
A straddle bought before an event, valued the morning after
Cost: 362 points. Had IV stayed at 20%, the next day's value with no move would be 295; after the crush the underlying has to move about 1.37% just to get the money back.
| Move by the next morning | Straddle value | P&L | Per NIFTY lot |
|---|---|---|---|
| 0.0% | 177 | −184 pts | −₹11,989 |
| 0.5% | 209 | −153 pts | −₹9,941 |
| 1.0% | 286 | −76 pts | −₹4,920 |
| 1.5% | 392 | +30 pts | ₹1,952 |
| 2.0% | 511 | +149 pts | ₹9,683 |
| 3.0% | 759 | +397 pts | ₹25,819 |
IV rank places today's IV within its range over the last year (0 = the lowest, 100 = the highest). Arthfy computes it over 252 sessions. Buying options when IV rank is high means paying up for volatility; selling when it is low means collecting little for the same risk.
