IV minus realised vol
Option prices embed a forecast of volatility, implied volatility, while the market's actual recent movement is realised volatility. The gap between the two is the volatility risk premium. This strategy sells a NIFTY monthly ATM straddle, hedged with wings, when implied vol is at least 5 points above the last 21 days' realised vol, and buys the straddle when it is 5 points below, holding until the gap closes or for up to ten sessions.How it trades
Results
PRE-BUILT · DEFAULTSWhere it made and lost money
Only 12 trades, so every bucket is small and none can be called reliable. The clearest split is the market during the hold: the 5 trades held while NIFTY fell more than 1% made ₹76,449, mostly long straddles bought when implied volatility was cheap, which gain when a fall lifts both volatility and the put. The 3 trades held while NIFTY rose more than 1% all lost, ₹46,119 in total, as rallies tend to push volatility down and hurt bought straddles while short straddles were stopped. Entries made with NIFTY below its 20-day average made ₹66,815 over 8 trades.
About this strategy
- Each day at 15:15, take the nearest NIFTY monthly expiry with at least 5 calendar days left and average the ATM call and put implied volatility.
- Compute realised volatility from the last 21 daily futures returns, annualised.
- If implied minus realised is 5 points or more, sell the ATM call and put and buy 10-delta call and put wings.
- If it is minus 5 points or less, buy the ATM call and put.
- Stop a short when the position costs 1.5 times the net credit, and a long when it loses 30% of the debit.
- Exit when the gap closes (checked daily at 15:15), after 10 trading days, or 2 trading days before expiry; only one position at a time.
Why traders use it
Studies across markets find that implied volatility usually sits above the volatility that follows, because buyers pay up for protection; option sellers earn that premium over time. When the gap is unusually wide, options look expensive and selling them has better odds; when implied vol drops below what the market has actually been doing, options look cheap and buying them makes sense. Comparing the two puts a number on what many traders judge by feel.
The year in plain words
On NIFTY from 1 Oct 2025 to 30 Sep 2026 the gap reached the 5-point threshold often enough for 12 trades, all between February and September 2026. Seven won; by exit, 3 closed when the gap closed, 5 two days before expiry and 4 on the stop. Wins averaged ₹15,299 and losses ₹11,830. Net P&L was ₹47,942 before costs and ₹45,472 after ₹20 per order and slippage (statutory charges excluded). March made ₹56,449, while February lost ₹18,044. Promising but thin: the profit rests mainly on one month.
What the settings do
Risks
- Twelve trades are too few to show whether the gap is a reliable signal.
- Realised volatility from rolled futures can jump on roll days, distorting the gap.
- Long straddles lose time value every day the expected move does not come.
- Short straddles, even with wings, can be stopped by a sharp move before the gap closes.
Who it suits
Experienced option traders who think in volatility terms, can manage multi-day positions in monthly options, and have hedged option-selling margin. Signals are infrequent, so it suits patient traders.
Questions traders ask
What is the volatility risk premium?
It is the tendency for implied volatility, the volatility priced into options, to be higher than the volatility that actually follows. Option sellers collect this premium over time as compensation for taking on the risk of large moves.
How is realised volatility calculated?
Here it is the standard deviation of the last 21 daily log returns of NIFTY futures, annualised by multiplying by the square root of 252 and expressed in volatility points, the same units as implied volatility.
Is the IV minus realised vol strategy profitable?
In this NIFTY backtest from 1 Oct 2025 to 30 Sep 2026 it made ₹47,942 before costs and ₹45,472 after ₹20 per order and bid-ask slippage, from just 12 trades. Statutory charges are not included. Past results do not guarantee future ones.
Why buy the straddle when implied vol is low?
If implied volatility is well below what the market has actually been doing, options are cheap relative to recent movement. Buying the straddle bets that volatility, or a large move, will catch up with what options are pricing.