Implied volatility is how much movement the options market is charging for. Realized volatility is how much the stock has actually been moving. The first is a price, read out of option premiums. The second is a measurement, read out of past closes. The gap between them is one of the few genuinely useful numbers in options, and it is the first thing on every F&O stock page we publish.
Pick any company from the stock directory, RELIANCE for instance, and the top of the page shows both numbers side by side with the gap between them. Free, no account needed.
Realized volatility: what already happened
We take the stock's last 30 daily closes, compute the day-to-day change in log terms, measure how spread out those changes are (their standard deviation), and scale that to a yearly figure by multiplying by the square root of 252, the number of trading days in a year. The result is a percentage: a realized volatility of 25% means the stock has recently been moving at a pace that, held for a year, is consistent with a typical yearly swing of about 25%.
We also show the 20-day version, because a shorter window reacts faster. When the two disagree, the stock's behaviour has recently changed.
Three things to keep in mind about it:
- It looks backwards. It describes the last month and says nothing certain about the next.
- It is sensitive to one big day. A single gap on results can lift a 30-day figure for a month, then drop out of the window all at once.
- It ignores direction. A stock rising steadily and one falling steadily can carry the same realized volatility.
Implied volatility: what the market is charging for
An option's premium depends on a handful of known inputs: the stock price, the strike, the time to expiry, interest rates. The one input nobody can observe is how much the stock will move. So you can run the pricing formula backwards: given the premium people are actually paying, what volatility would justify it? That answer is implied volatility.
We use the at-the-money option of the nearest expiry, because it is usually the most traded contract in the chain and the least distorted by the skew that far strikes carry.
Implied volatility is not a forecast in the way a weather forecast is. It is a price, set by supply and demand. Before results, a budget or an expiry, people pay up for protection and implied volatility rises whether or not the stock ends up moving.
The gap, and what "rich" and "cheap" mean on our page
We subtract realized from implied, in volatility points, and label the result:
- Rich when implied is at least 4 points above realized. Options are priced for more movement than the stock has recently delivered.
- Cheap when implied is at least 4 points below realized. Options are priced for less movement than the stock has recently delivered.
- Fair in between.
The 4-point line is a convention for reading the page quickly, not a statistical threshold, and we say so because it is easy to mistake a label for a finding.
Rich does not mean "sell options" and cheap does not mean "buy them". A gap can persist for good reasons. Implied volatility is usually above realized, on average, because option writers want paying for the risk of a sudden move that a quiet month never shows. And a stock with results next week is rich for an obvious reason that the past 30 days cannot know about.
The useful reading is: here is what the market is charging for, here is what the stock has been doing, and here is how far apart they are. What you conclude from that depends on what you know that the numbers do not, such as an upcoming event.
Is implied volatility the same as India VIX?
No. India VIX is an index-level measure built from NIFTY options across strikes. The implied volatility on a stock page comes from that one stock's at-the-money option. They often move together, but a single company can be calm on a panicky day or the other way round. India VIX is on Market Today and Options Today.
Why is implied volatility usually higher than realized?
Because option writers carry the risk of a sudden large move and want paying for it. That premium is the reason systematic option selling makes money most of the time and loses a great deal occasionally. A persistent gap is normal. A gap that is unusually wide or has flipped the other way is the part worth noticing.
Why does the stock page sometimes show no comparison?
Because one of the two inputs is missing. Implied volatility needs a live option chain with a priced at-the-money contract, and realized volatility needs enough recent closes. If either is not available, we show nothing rather than a number built on half the data.
Test the idea rather than trusting the label
"Sell options when they look expensive" is a rule, and a rule can be tested. Our options backtester works on the five indices rather than on single stocks, and it lets you gate an entry on IV rank (where today's implied volatility sits in its own 52-week range) and on India VIX, then replays the result across every expiry we hold with every charge deducted. Options backtesting is on the paid plan. The depth behind it: Index options from 2016 for NIFTY and BANKNIFTY, 2021 for FINNIFTY, 2022 for MIDCPNIFTY and 2024 for NIFTY Next 50These are the dates each contract was LISTED, not gaps in our data. Ten years of options history cannot exist for an index whose options have existed for five.
Options rules are checked once a day on the settle price, except for minute testing on one index EdgeTest is analysis only. It does not give investment advice, does not place orders, and is not registered with SEBI