Synthetic IV vs VIX spread
This volatility strategy compares two measures of the same thing: the average implied volatility read directly from the NIFTY option chain, and India VIX. Each is turned into a 20-day z-score. When the two scores pull far apart, the strategy buys or sells the NIFTY monthly at-the-money straddle and holds it until they come back together, or for at most five sessions.How it trades
Results
PRE-BUILT · DEFAULTSWhere it made and lost money
With 16 trades, only the session-direction split has enough trades on both sides to judge. Signals taken on days when NIFTY closed below its open made ₹36,603 over eight trades, against ₹3,869 on up-closing days, because a falling market tends to lift volatility and the straddle positions, often long, gained from both the move and the volatility. The smaller buckets point the same way: three entries after an India VIX close above 14.5 made ₹54,906, while six in calm markets below 11.5 lost ₹17,931. Eight trades begun on quiet sessions lost ₹14,693, as straddles held through little movement simply lost value to time.
About this strategy
- At 15:20 each day, average the implied volatility of NIFTY monthly options 15 to 45 days out, using strikes from 85% to 115% of the forward and trimming the extreme 5% at each end.
- Turn both this synthetic IV and the India VIX close into z-scores over the last 20 sessions, and take the difference.
- If synthetic IV's score is 1.5 or more above VIX's, buy the ATM straddle of the nearest monthly with at least 10 days left at 09:20 the next morning.
- If it is 1.5 or more below, sell that straddle instead.
- Close at 09:20 on the session after the gap shrinks back inside 0.2, or at the close of the fifth session held, whichever comes first; there is no stop.
Why traders use it
India VIX and the option chain usually tell the same story about volatility, so a sharp disagreement between them hints that one is out of line. Using z-scores puts both on a common scale, adjusting for their recent level and noise. Trading the gap is a relative-value idea rather than a market forecast. The straddle stands in for a direct volatility position, which is otherwise hard to take because India VIX futures are not actively traded.
The year in plain words
Between 1 Oct 2025 and 30 Sep 2026 the gap reached 1.5 sigma often enough for 16 NIFTY straddle trades. Half won, and the strategy made ₹40,472 before costs with a profit factor of 1.81, or ₹34,098 after ₹20 per order and bid-ask slippage. Eight trades closed when the gap reverted and eight at the five-session limit. The path was uneven: October and December 2025 lost a combined ₹24,915, then May and June 2026 made ₹31,801 and ₹23,104. The maximum drawdown before costs was about ₹33,000, close to the final profit, and 16 trades is a small sample.
What the settings do
Risks
- A straddle is not a pure volatility bet: its result also depends on how far NIFTY moves and on time decay.
- Short-straddle trades have no stop and can lose heavily on a sharp move during the hold.
- The thresholds and hold period come from a parameter search over a short history and may not carry over.
- With about 16 trades a year, a couple of outcomes can swing the total.
Who it suits
Traders interested in volatility and relative-value ideas, comfortable with both long and short ATM straddles held for several days, and with the margin for the short side.
Questions traders ask
What is synthetic IV?
It is an average of implied volatilities taken directly from the NIFTY option chain, here monthly expiries 15 to 45 days out and strikes within 15% of the forward, with extreme values trimmed. It measures much the same thing as India VIX but is built independently.
Did the IV vs VIX spread strategy make money?
On NIFTY from 1 Oct 2025 to 30 Sep 2026 it made ₹40,472 before costs and ₹34,098 after ₹20 per order and bid-ask slippage, from 16 trades with a 50% win rate. Statutory charges are excluded. The sample is small and the maximum drawdown was nearly as large as the profit; past results do not guarantee future ones.
Why trade a straddle instead of India VIX futures?
India VIX futures are thinly traded and not in the backtest data, so the volatility view is expressed with the NIFTY monthly ATM straddle. That changes the profile: a straddle also gains or loses from the index's moves and from time decay.
What is a z-score?
A z-score says how many standard deviations today's value is from its recent average. A score of +2 means unusually high for the last 20 sessions. Comparing z-scores lets two series on different scales be compared fairly.