Implied volatility isn't a single number — it's a surface. Options at different strikes and expiries have different IVs. Understanding this landscape is where directional traders become vol traders.
An option’s IV depends on:
Combined: the volatility surface — a 3D landscape of IV.
Toggle “By Strike” to see the skew across strikes; “By Expiry” to see the term structure. Switch regimes to see how the shape changes.
For a given expiry, plot IV against strike. Result:
Portfolio insurance demand. Institutional traders continuously buy Nifty puts to hedge equity portfolios. This constant buying pressure lifts put IV relative to call IV.
Crash risk pricing. Real drops are faster than rallies. Markets go up escalator, down elevator. Options price this asymmetry.
Result: Nifty OTM puts are systematically more expensive than equidistant OTM calls.
Nifty at 25,000. Weekly options 5% away from spot:
Same distance from spot, IV difference of 5 vol points. Put is significantly richer.
Trade implication: if you’re selling strangles, the put side pays more premium per unit of risk. Consider selling more aggressive puts vs. more conservative calls.
Plot ATM IV against days to expiry. Three patterns:
Contango (normal): short-dated IV < medium-dated IV < long-dated IV
Flat: all expiries same IV
Backwardation: short-dated IV > medium > long
Zerodha Sensibull and other platforms show IV by expiry. Check it before establishing any short-vol position. Backwardation = something scheduled, be careful.
Some assets (commodities, biotech stocks, single-name event risk) show U-shaped IV:
Common on:
1. Selling premium: pick the fatter side
When selling strangles, sell more OTM on the low-IV side, less OTM on the high-IV side. For Nifty:
2. Buying insurance: watch the skew steepness
If put skew steepens dramatically, insurance is getting expensive → hedges may not be cost-effective. Consider portfolio hedging via futures instead.
3. Vertical spreads exploit skew
Bull put spread (sell higher-strike put, buy lower-strike put): benefits from steep put skew. The short put pays richly; the long put is cheaper (deeper OTM = lower IV).
Rough shape at any given moment:
| Strike | Weekly IV | Monthly IV | Quarterly IV |
|---|---|---|---|
| 23,000 (deep OTM put) | 21% | 19% | 18% |
| 24,000 (OTM put) | 18% | 17% | 17% |
| 25,000 (ATM) | 15% | 15% | 16% |
| 26,000 (OTM call) | 13% | 14% | 15% |
| 27,000 (deep OTM call) | 12% | 13% | 14% |
Down-sloping skew, term structure in mild contango — a “normal” Nifty day.
Watch for skew steepening — a sign of institutional put buying (defensive positioning). Often precedes market weakness.
Watch for term structure inversion (backwardation) — always signals near-term uncertainty (event, macro data, geopolitics).
Watch for smile emerging on Nifty — unusual; suggests two-way risk being priced (rare but happens near elections, major RBI meetings).
Some quant traders trade skew changes:
Not for beginners but worth knowing as you grow.
When put skew is unusually steep (skew ratio > 1.5 for Nifty), OTM puts are overpriced.
Trade: put ratio spread
Collects premium from the fat side of the skew. Bet: skew normalizes or Nifty stays above short strike.
When call IV is unusually low relative to put IV, upside is under-priced.
Trade: long OTM call outright, or bull call spread with narrow wings.
Setup: post-crash environment when fear is priced in but recovery is coming. Nifty at 22,000 after a 15% drop; call skew flattened due to defensive positioning; buying 5% OTM calls cheap.
Risk reversal = sell OTM put + buy OTM call (25-delta each). Zero-cost or small credit if put skew > call.
Bet: skew flattens (either put IV drops or call IV rises). Also bullish on direction.
Common institutional trade around expected market turnarounds.
When weekly IV > monthly IV (backwardation), sell weekly, buy monthly:
Cross-asset: if Nifty put skew is elevated but BankNifty is not (or vice versa), the cheaper skew can hedge exposure to the richer.
Retail: too fee-intensive.
25-Delta Skew = IV(25-delta put) − IV(25-delta call)
Higher value = steeper skew (more put-favoring)
Interpretation for Nifty:
90/110 Skew = IV(90% strike put) − IV(110% strike call)
Uses fixed % OTM strikes, not delta. Easier for retail to compute.
Term Ratio = 30-day ATM IV / 90-day ATM IV
< 1.0 = contango (normal)
1.0 = backwardation (event-driven)
Long-run Nifty:
Bank Nifty:
The most useful daily reading:
Together: is fear elevated (VIX high, skew high) or complacent (both low)?
Traders’ rule: systematically sell premium when BOTH VIX and skew are elevated at 90th+ percentile. Systematically buy premium when both are at 10th- percentile. Neither: neutral.