Volatility glossary
Plain-English definitions of the vocabulary used across this library — from "annualised volatility" to "vomma". 106 terms, each linking to the page that explains it properly.
A
Annualised Volatility
Also: Annualized volatility
Volatility scaled to a one-year horizon so numbers from different periods can be compared. A daily standard deviation is multiplied by the square root of the number of trading days (about 252 in India) to annualise it. The common mistake is to multiply by 252 instead of its square root, which wildly overstates the figure.
ARCH
Also: Autoregressive Conditional Heteroskedasticity
A model, introduced by Engle, in which today's variance depends on the size of recent squared returns. It captures the fact that big moves tend to follow big moves, so volatility comes in bursts rather than staying constant. It is the ancestor of GARCH and the starting point for most volatility forecasting.
At-the-Money
Also: ATM
An option whose strike sits at or very near the current price of the underlying. ATM options carry the most time value and the highest sensitivity to volatility, which is why traders read implied volatility off them. For a NIFTY at 24,000, the 24,000 strike is the ATM contract.
ATM Straddle Approximation
The rule that the at-the-money straddle price is about 0.8 times spot times annualised volatility times the square root of time to expiry. It gives a quick read on the expected move without a full pricing model. The approximation tightens for short-dated options and loosens as expiry stretches out.
See: Expected Move · Implied Volatility
B
Backwardation
A term structure where near-dated volatility trades above far-dated volatility, producing a downward-sloping curve. It usually appears during stress, when the market fears a sharp move very soon but expects calm to return later. Contrast with contango, the normal upward slope.
See: Backwardation · What is Term Structure? · Contango
Bipower Variation
A way of estimating the smooth, continuous part of realised variance while filtering out sudden jumps. It multiplies adjacent absolute returns instead of squaring single returns, so isolated spikes contribute less. Comparing it with total realised variance is a standard test for whether a day contained a jump.
Bisection Method
A simple numerical technique for backing out implied volatility from an option price. You bracket the answer between a low and a high guess, then repeatedly halve the interval until the model price matches the market price. It is slower than Newton's method but robust, since it cannot diverge.
Black-Scholes Model
Also: Black-Scholes-Merton
The benchmark formula for pricing European options from spot, strike, time, rate and one volatility number. Its assumption of a single constant volatility is why real markets show a smile rather than a flat line. It remains the shared language for quoting options because implied volatility is defined by inverting it.
See: Implied Volatility · Volatility Smile · How IV is Calculated
Brenner-Subrahmanyam Approximation
A quick closed-form estimate of at-the-money implied volatility from the option's price. It says the ATM straddle premium is roughly 0.8 times spot times volatility times the square root of time. Handy for a fast mental check, though it drifts once you move away from the money.
See: Implied Volatility · Expected Move
Butterfly Arbitrage
A no-arbitrage condition stating that call prices must be convex across strikes, so a butterfly spread can never cost less than nothing. If a volatility smile violates it, you could in theory lock in a mispricing. Surface-fitting engines enforce this to keep quoted smiles internally consistent.
C
Calendar Arbitrage
A no-arbitrage condition across expiries: total implied variance must not fall as time to expiry increases. If a near month prices in more variance than a far month at the same strike, the term structure is inconsistent. Surface builders impose this alongside butterfly arbitrage.
See: Volatility Surface · What is Term Structure? · Calendar Structure
Calendar Spread
Also: Time spread, horizontal spread
Selling a near-dated option and buying a longer-dated one at the same strike to trade the term structure and time decay. It profits when the front leg loses value faster or when near-term volatility falls relative to far-term. The position is long vega overall, so a broad volatility collapse still hurts it.
See: Calendar Trading Concepts · Calendar Structure · IV and Theta
CBOE VIX
Also: VIX
The Chicago Board Options Exchange index of expected 30-day volatility on the S&P 500, derived from a strip of option prices. It is the original fear gauge and the template India VIX copies. A reading above 28 signals stress, while calm markets sit in the low teens.
See: CBOE VIX · India VIX · Fear Index
Charm
Also: Delta decay
The rate at which an option's delta changes as time passes, holding price fixed. It matters most near expiry for options close to the strike, where delta can swing fast over a single day. Hedgers watch charm to avoid waking up over- or under-hedged.
See: Delta Hedging · IV Before Expiry
Clustering
Also: Volatility clustering
The tendency for calm and turbulent periods to persist rather than alternate randomly. Large moves cluster with large moves and quiet days with quiet days, which is why volatility is forecastable at all. It is the empirical fact that ARCH and GARCH models were built to capture.
Contango
A term structure where far-dated volatility trades above near-dated, giving an upward-sloping curve. This is the normal state in calm markets, reflecting greater uncertainty further out. Sellers of near-term volatility often collect roll yield as time passes in contango.
See: Contango · What is Term Structure? · VIX Futures
Convexity
A curved, nonlinear payoff, most visibly gamma in options: value accelerates as the underlying moves your way. Long option positions are convex, which is why a small move can pay off out of proportion to what a linear position would earn. Convexity is never free; you pay for it in time decay.
See: Gamma Scalping · Long Volatility · IV and Theta
Correlation
How closely two assets move together, ranging from minus one to plus one. In a crisis, correlations across stocks jump toward one, so index volatility rises even when single-stock volatility does not. This gap between index and component volatility is what dispersion trades try to harvest.
Crisis Volatility
The regime of extreme, persistent volatility during a market crash, when the fear index spikes and correlations rush toward one. Term structure often inverts into backwardation as near-term panic tops long-term uncertainty. Realised volatility in these episodes can dwarf anything option sellers priced beforehand.
See: Crisis Volatility · Backwardation · High Volatility Markets
D
Delta
How much an option's price moves for a one-point move in the underlying, from zero to one for calls. It doubles as a rough probability that the option finishes in the money. Delta shifts as spot, time and volatility change, so a hedge based on it must be maintained, not set once.
See: Delta Hedging · Implied Volatility
Delta Hedging
Offsetting an option's directional risk by holding an opposing position in the underlying sized to the option's delta. Because delta drifts as the market moves, the hedge must be rebalanced, and those adjustments are how a volatility trader realises gamma. Do it too rarely and direction leaks back into the book.
See: Delta Hedging · Gamma Scalping
Dispersion Trading
Selling index volatility while buying volatility on its individual constituents, or the reverse, to bet on correlation. It profits when index volatility is expensive relative to the components, which happens when the market overprices how tightly stocks will move together. The main risk is a correlation spike that lifts index volatility past the single names.
Dupire Local Volatility
A model that reads a single volatility for every price-and-time point directly off the observed option surface. It reproduces today's smile exactly, which makes it useful for pricing exotics consistently with vanillas. Its weakness is unrealistic forward smile dynamics, so it is a fitting tool more than a forecasting one.
E
Earnings Volatility
The elevated implied volatility options carry ahead of a company's results, pricing in the expected jump. It inflates before the announcement and collapses in the crush right after, regardless of the direction the stock takes. Buyers must clear both the premium and the post-event IV drop to profit.
See: Earnings Volatility · IV Crush · Event Volatility
EWMA
Also: Exponentially Weighted Moving Average
A volatility estimate that weights recent returns more heavily than older ones, with the weights decaying geometrically. It reacts faster to new shocks than a plain rolling window and needs only one smoothing parameter. RiskMetrics popularised it as a lightweight forecast, and it is effectively GARCH without mean reversion.
Expected Move
The size of the swing the option market is pricing in over a given period, from spot times implied volatility times the square root of time. A rough shortcut is the price of the at-the-money straddle. Remember it is a one-standard-deviation range, so the actual move exceeds it roughly a third of the time.
See: Expected Move · Standard Deviation · Implied Volatility
Expected Volatility
The market's forward-looking view of how much an asset will move, as opposed to what it has already done. Implied volatility is the tradable proxy for it, extracted from option prices. Because it is a forecast, it can be wrong, and the gap versus realised volatility is the volatility risk premium.
See: Expected Volatility · Implied Volatility · Volatility Risk Premium
Expiry
Also: Expiration
The date an option ceases to exist and settles. Indian index options are European and cash-settled at expiry, while single-stock options are American and physically settled. As expiry nears, time value bleeds out fast and gamma near the strike explodes, making the last hours the most treacherous to hedge.
F
Fat Tails
Also: Heavy tails
The empirical fact that extreme returns happen far more often than a normal bell curve predicts. Markets crash and spike with a frequency a Gaussian would call impossible, which is why simple models understate risk. Fat tails are why out-of-the-money options trade richer than Black-Scholes with a flat volatility would suggest.
Fear Index
A nickname for a volatility index like India VIX or the CBOE VIX, since it spikes when markets fall. The name captures a real pattern: volatility and price tend to move in opposite directions. It measures the magnitude of expected moves, though, not their direction, so a high reading is not itself a sell signal.
See: Fear Index · India VIX · Market Sentiment
Forward Rate Assumption
Also: Cost of carry
The financing and dividend assumptions that set an option's forward price, feeding straight into implied volatility. Getting the carry wrong shifts the whole smile and can masquerade as skew. For Indian index options, the implied forward is backed out from put-call parity rather than assumed.
Forward Variance
The variance the market implies for a future window, such as the month after next, stripped of the period before it. It is computed by differencing total variance across two expiries. Because variance adds cleanly over time while volatility does not, forwards are worked out in variance and only then converted back.
See: Forward Volatility · Variance · What is Term Structure?
Forward Volatility
The volatility implied for a period that begins in the future, backed out from two different expiries today. It answers what the market thinks volatility will be later, not now. Because near and far variance both feed into it, forward volatility is more sensitive to term-structure shape than any single quote.
See: Forward Volatility · What is Term Structure? · Calendar Structure
G
Gamma
How fast an option's delta changes as the underlying moves; it is the curvature of the payoff. High gamma means the hedge needs constant adjustment, which is both the opportunity and the cost of being long options. Gamma peaks for at-the-money options and grows explosive in the final days before expiry.
See: Gamma Scalping · IV Before Expiry
Gamma Scalping
Running a long-gamma, delta-hedged book and trading the underlying against every move to bank small profits. Each rebalance buys low and sells high mechanically, and those gains offset the theta you pay to hold the options. It wins when realised volatility beats the implied volatility you paid, and loses when the market sits still.
See: Gamma Scalping · Delta Hedging · HV vs IV
GARCH
Also: Generalised ARCH
A model where today's variance depends on both recent squared returns and yesterday's variance, giving a smooth, mean-reverting forecast. Bollerslev's generalisation of ARCH is the workhorse for volatility prediction because it captures clustering with few parameters. Its long-run level is the average volatility the series reverts toward.
See: Volatility Clustering · Mean Reversion in Volatility · Historical Volatility
H
Heston Model
A stochastic volatility model where variance itself follows a random, mean-reverting path correlated with price. That correlation generates a realistic skew, and the vol-of-vol parameter controls how pronounced the smile is. It is popular because it has a semi-closed-form solution for European options.
High-Volatility Markets
Conditions where prices swing widely, option premiums are rich and the fear index runs elevated. Long-volatility trades that bled in calm periods can pay off fast, while short-volatility sellers face outsized risk. High volatility tends to mean-revert, so extreme readings rarely persist indefinitely.
See: High Volatility Markets · Crisis Volatility · Mean Reversion in Volatility
Historical Volatility
Also: Realised volatility, statistical volatility
The actual volatility an asset has shown, computed from past returns over a chosen window. It is backward-looking, so it tells you what happened, not what will. Comparing it against implied volatility shows whether options are pricing in more or less movement than the recent past delivered.
I
Implied Volatility
Also: IV
The volatility number that makes a pricing model reproduce an option's market price; it is the market's forecast of future movement. It rises when demand for protection climbs and falls after the uncertainty passes. Crucially it is priced per option, which is why strikes and expiries each carry their own IV, forming the smile and term structure.
See: Implied Volatility · How IV is Calculated · Why IV Changes
India VIX
The NSE index of expected 30-day NIFTY volatility, built from a strip of near and next-month option prices. It typically sits in the low-to-mid teens and spikes around events like RBI policy, the Union Budget and election results. Traders read it as a fear gauge, but it measures expected magnitude, not market direction.
See: India VIX · Fear Index · IV Around Events
Intraday Volatility
How much price fluctuates within a single trading session, often concentrated at the open and around news. Estimators like Parkinson use the day's high and low to capture it more efficiently than close-to-close returns. In India it spikes at 9:15 am and around scheduled announcements during the day.
IV Around Events
The recurring pattern of implied volatility rising as a scheduled event nears and crushing once it passes. In India this plays out sharply around RBI policy meetings, the Union Budget and election counting days. The direction of the move is unknown, but the timing of the volatility swing is highly predictable.
See: IV Around Events · IV Around RBI Policy · IV Around the Union Budget
IV Crush
The sharp drop in implied volatility right after an anticipated event resolves, such as a result or policy decision. The uncertainty premium built into options evaporates once the news is out, so premiums fall even if the stock moved. Buyers who paid up before the event often lose despite calling the direction correctly.
See: IV Crush · IV After Expiry · Event Volatility
IV Expansion
A rise in implied volatility as an event approaches or as fear enters the market, lifting option premiums. It is the mirror image of IV crush and rewards holders of long-volatility positions. Anticipating expansion before a budget or earnings date is a common reason to buy options early.
See: IV Expansion · Why IV Changes · IV Around Events
IV Percentile
The share of days over the past year on which implied volatility was lower than today's reading. Unlike IV rank, it accounts for how the values are distributed, so a few extreme spikes do not distort it. A percentile above 80 says current IV is high relative to its own recent history.
See: IV Percentile · IV Rank
IV Rank
Where current implied volatility sits between its lowest and highest points over the past year, scaled from zero to 100. A rank of 100 means IV is at a one-year high, hinting that options are relatively expensive. Because it depends only on the extremes, a single past spike can flatten every other reading.
See: IV Rank · IV Percentile
J
Jump Risk
The danger of a sudden, discontinuous move that a smooth diffusion model cannot hedge away. Gaps around earnings, policy shocks or overnight news are jumps, and they are why deep out-of-the-money options stay expensive. Delta hedging fails across a jump because price skips past every rebalancing point.
See: Event Volatility · Volatility Smile
K
Kurtosis
A measure of how heavy a distribution's tails are relative to the normal bell curve. Return distributions have excess kurtosis, meaning extreme moves are more common than a Gaussian predicts. High kurtosis is the statistical fingerprint of crash risk and a key reason options carry a volatility smile.
See: Volatility Smile · Volatility Skew
L
Leptokurtic
A distribution with a sharper peak and fatter tails than the normal curve, so both tiny and huge moves are over-represented. Daily equity returns are leptokurtic, which undermines models that assume normality. It is the reason a flat Black-Scholes volatility misprices the wings of the option chain.
See: Volatility Smile · Volatility Skew
Leverage Effect
The tendency for volatility to rise more when prices fall than when they rise by the same amount. One explanation is that a falling stock raises a firm's debt-to-equity ratio, making it riskier. This asymmetry is a structural driver of the downside skew seen in equity index options.
See: Volatility Skew · Why IV Changes
Local Volatility
A framework assigning one deterministic volatility to each combination of price and time, calibrated to fit today's option surface exactly. It guarantees consistency with observed vanilla prices, so it is favoured for pricing path-dependent exotics. Its forward smile behaves unrealistically, which is why traders pair it with stochastic-volatility thinking.
Lognormal Distribution
The assumption in Black-Scholes that prices, not returns, follow a bell curve in logarithm, so prices stay positive. It implies returns are normally distributed, which understates the fat tails real markets show. The gap between this idealisation and reality is precisely what the volatility smile corrects for.
See: Volatility Smile · Volatility Skew
Long Volatility
A position that profits when volatility rises or when the underlying moves a lot, typically by owning options. It carries positive gamma and vega but bleeds theta every day the market is quiet. The trade-off is a stream of small losses in calm markets in exchange for a large payoff when a shock finally hits.
See: Long Volatility · Long Vega · Gamma Scalping
Low-Volatility Markets
Calm conditions with small daily moves, cheap options and a subdued fear index. Short-volatility strategies quietly collect premium here, but complacency builds because a shock can end the regime abruptly. Low volatility clusters and mean-reverts, so unusually quiet stretches often precede a jump.
See: Low Volatility Markets · Volatility Clustering · Mean Reversion in Volatility
M
Mean Reversion
The tendency of a series to drift back toward a long-run average after straying. Volatility is strongly mean-reverting, so extreme highs and lows rarely last, which is what makes it forecastable. Traders fade very high or very low readings on the expectation they will normalise.
Model Risk
The risk that a pricing or hedging model is simply wrong, so its outputs mislead. Assuming constant volatility, ignoring jumps or trusting a calibration outside its comfort zone all invite it. The defence is to know each model's assumptions and stress-test positions against the ones most likely to break.
Moneyness
How far an option's strike sits from the current price, describing whether it is in, at or out of the money. It is often measured in deltas or in standard deviations rather than rupees, so options across names can be compared. Moneyness is the horizontal axis of the volatility smile.
N
Newton-Raphson Method
A fast iterative technique for solving implied volatility using vega as the derivative to home in on the answer. It converges in a handful of steps for well-behaved options but can overshoot deep in or out of the money. Solvers often fall back to bisection when Newton's step misbehaves.
O
Ornstein-Uhlenbeck Process
A continuous-time process that drifts back toward a central level with random noise, the classic model of mean reversion. Variance and volatility are often modelled with it or its variants because they too revert. The log of volatility following such a process underpins several stochastic-volatility models.
See: Mean Reversion in Volatility · VVIX
P
Parkinson Estimator
A volatility estimate that uses each day's high and low instead of just the close, capturing intraday range. Because it exploits more of the day's information, it is more efficient than close-to-close for a trending or wide-ranging session. It assumes no jumps and no overnight gaps, so it understates volatility when those dominate.
Pin Risk
The uncertainty an option seller faces when the underlying closes right at the strike on expiry, leaving assignment unclear. For physically settled single-stock options in India, you may not know if you were exercised until after the close. Cash-settled index options avoid delivery pin risk but still see prices magnetise toward big strikes.
See: Expiry Structure · IV Before Expiry
Put-Call Parity
The no-arbitrage link tying a call, a put, the underlying and a bond at the same strike and expiry. It forces a call and put on the same strike to share one implied volatility, which is why skew is a property of strikes, not option type. A visible parity gap signals a data error or a funding cost, not a free lunch.
R
Range-Bound Markets
Markets that oscillate within a band without a clear trend, where realised volatility stays low despite frequent small moves. Selling strangles or straddles tends to work because the underlying keeps returning to the middle. The danger is a breakout that turns a quiet short-volatility book into a fast loss.
Realised Variance
Also: Realized variance
The sum of squared returns over a period, the raw measure of how much an asset actually moved. Sampled at high frequency it estimates the day's variance precisely, subject to microstructure noise. Its square root is realised volatility, and it is the settlement reference for a variance swap.
See: Realized Variance · Realized Volatility · Variance
Realised Volatility
Also: Realized volatility, historical volatility
The volatility an asset actually delivered, the square root of realised variance over a window. It is what a long-volatility trader ultimately gets paid on, versus the implied volatility they paid. When realised beats implied, option buyers win; when it lags, sellers collect the premium.
Risk Reversal
The difference in implied volatility between an out-of-the-money call and an equidistant out-of-the-money put, a compact gauge of skew. A negative risk reversal means puts are richer than calls, the norm for equity indices where crash fear dominates. Traders quote it to track how skew is shifting over time.
See: Volatility Skew · Volatility Smile
Risk-Neutral Probability
The set of probabilities implied by market prices when everyone is assumed indifferent to risk, used for pricing. It is not the real-world probability; option prices embed a risk premium that tilts it. This is why the risk-neutral chance of a crash inferred from puts exceeds the historical frequency.
Roll Yield
The gain or loss from holding a futures or volatility position as it rolls down the term structure toward expiry. In contango, a long position loses roll yield while a short earns it, all else equal. It is a major driver of returns for VIX-style products, sometimes swamping the change in spot volatility itself.
See: Contango · VIX Futures · VIX Term Structure
Rolling Volatility
A volatility estimate computed over a moving window that advances each day, dropping the oldest return as a new one arrives. It smooths the series but lags turning points, and a single old shock can distort it until it exits the window. Shorter windows react faster but are noisier.
S
SABR Model
A stochastic-volatility model, popular for rates and swaptions, whose parameters map directly onto the level, skew and curvature of the smile. Its widely used approximation lets traders fit and interpolate a smile quickly. It gives an intuitive handle on how each parameter reshapes the wings.
See: Volatility Smile · VVIX
Sample Standard Deviation
The everyday estimate of dispersion, dividing summed squared deviations by n minus one to correct for using an estimated mean. It is the raw statistic behind a historical volatility figure before annualising. The n-minus-one adjustment matters most on short windows, where a few observations can bias a naive divisor.
Short Volatility
A position that profits when volatility falls or the market stays quiet, typically by selling options. It collects theta daily but carries negative gamma, so a sudden large move can inflict outsized losses. The classic warning is that short volatility feels calm for long stretches, then loses badly all at once.
See: Short Volatility · Short Vega · IV Crush
Skew
Also: Volatility skew
The pattern where implied volatility varies with strike, usually higher for downside puts on equity indices. It reflects demand for crash protection and the leverage effect that links falling prices to rising volatility. A steepening skew is often read as growing anxiety about a drop.
See: Volatility Skew · Volatility Smile
Skewness
A statistical measure of a distribution's asymmetry. Equity returns are negatively skewed, meaning crashes are sharper than the rallies, which is the return-side counterpart to option skew. Positive skewness, by contrast, shows up in assets prone to sudden jumps upward.
See: Volatility Skew · Volatility Smile
Smile
Also: Volatility smile
The U-shaped curve of implied volatility across strikes, with the wings priced above the at-the-money centre. It exists because real returns have fatter tails than the lognormal model assumes, so out-of-the-money options are worth more. In equities the smile is usually lopsided, a skew, with the put side higher.
See: Volatility Smile · Volatility Skew
Square-Root-of-Time Rule
The convention that volatility scales with the square root of the horizon, so weekly volatility is daily volatility times the square root of five. It follows from assuming returns are independent across days. The rule breaks when returns are autocorrelated or volatility clusters, which they do, so treat it as an approximation.
Standard Deviation
The most common measure of how far returns spread around their average, and the statistical definition of volatility. One standard deviation captures roughly two-thirds of outcomes if returns were normal, which they are not. In options it defines the expected-move range priced by at-the-money implied volatility.
See: Standard Deviation · Expected Move · Variance
Sticky Delta
Also: Sticky moneyness
A rule of thumb where the smile stays fixed against moneyness or delta, so an option's implied volatility depends on its delta rather than its strike. As spot moves, each delta keeps its volatility and strikes re-price. It tends to describe calm, trending markets better than sudden shocks.
See: Sticky Delta · Volatility Smile · Trending Markets
Sticky Strike
A rule of thumb where each strike keeps its implied volatility as spot moves, so the smile stays pinned to strikes. It often fits quiet, range-bound conditions and changes the delta you should hedge with versus sticky delta. Which regime holds affects your hedge, so the wrong assumption leaves residual risk.
Straddle
Buying a call and a put at the same strike and expiry to bet on a big move in either direction. Its cost is a clean read on the expected move the market is pricing. The buyer needs realised movement to exceed the combined premium, so a straddle bought into high IV can lose even on a decent move once IV crushes.
See: Expected Move · Long Volatility · IV Crush
Strangle
Buying an out-of-the-money call and put to bet on a large move while paying less than a straddle. The cheaper entry buys a wider breakeven, so the underlying must travel further before it pays. Sold rather than bought, a strangle is a short-volatility position that profits from a quiet, range-bound market.
See: Long Volatility · Short Volatility · Range-bound Markets
T
Term Structure
How implied volatility varies across expiries for a given underlying, plotted from near to far months. Upward-sloping in calm markets (contango) and often inverted under stress (backwardation), it reveals when the market expects the action. Event dates like a budget can create a visible bump in the otherwise smooth curve.
See: What is Term Structure? · Contango · Backwardation
Theta
Also: Time decay
The rate at which an option loses value as time passes, all else equal. It is the rent a long-option holder pays for gamma and vega, and the income a seller collects. Theta accelerates as expiry nears for at-the-money options, which is why the final week decays fastest. Theta is never free money; it is compensation for real risk.
See: IV and Theta · IV Before Expiry · Gamma Scalping
Trending Markets
Markets moving persistently in one direction, where realised volatility can stay high even without violent daily swings. Sticky-delta smile behaviour tends to describe them, and directional option strategies outperform pure volatility plays. A strong trend can keep realised volatility above implied for longer than sellers expect.
See: Trending Markets · Sticky Delta · HV vs IV
V
Vanna
A second-order Greek measuring how delta shifts when volatility changes, or equivalently how vega shifts with spot. It matters for hedging skewed books, since a move in either spot or volatility unbalances both hedges at once. Dealers managing large skew positions watch vanna to avoid surprise directional exposure.
See: Volatility Skew · Delta Hedging · IV and Vega
Variance
The square of standard deviation, and the quantity that adds cleanly over time when returns are independent. Because variances sum where volatilities do not, term-structure and forward calculations are done in variance first. Products like variance swaps settle on it directly rather than on volatility.
See: Variance · Standard Deviation · Realized Variance
Variance Ratio Test
A statistical test of whether returns follow a random walk by comparing variance over long horizons with scaled short-horizon variance. A ratio above one signals trending or positive autocorrelation; below one signals mean reversion. It is one way to check whether the square-root-of-time rule holds for a series.
Variance Swap
A contract that pays the difference between realised variance and a fixed strike, giving pure exposure to volatility with no delta. Its fair strike is built from a whole strip of option prices, so it embeds the entire smile. Because it pays on variance, its losses in a crash grow with the square of the move, a nasty convexity for sellers.
Vega
How much an option's price moves for a one-point change in implied volatility. It is largest for at-the-money options with plenty of time left and shrinks as expiry approaches. A book can be delta-neutral yet still swing on vega, so a volatility trader tracks it as a first-class risk.
See: IV and Vega · Long Vega · Short Vega
Vega Bucketing
Splitting a book's total vega across different expiries because volatility does not move uniformly along the curve. A near-month spike can hurt even when the far months are calm, so a single net vega hides the real exposure. Bucketing lets a trader hedge each part of the term structure separately.
See: IV and Vega · What is Term Structure? · Long Vega
VIX Futures
Exchange-traded futures on a volatility index that let you take a position on expected future volatility without an options book. They usually trade in contango, so a passive long position bleeds roll yield over time. Their term structure, from near to far contracts, is itself a closely watched sentiment signal.
See: VIX Futures · Contango · VIX Term Structure
VIX Options
Options written on a volatility index, used to hedge or speculate on the level of volatility itself. They settle against the index value, so their behaviour reflects the forward, not spot, volatility. Because volatility is mean-reverting and spikes upward, these options carry their own pronounced skew.
See: VIX Options · VIX Futures · VVIX
Vol-of-Vol
Also: Volatility of volatility
Shorthand for how volatile volatility is, controlling the curvature of the smile and the price of options on volatility. A jump in vol-of-vol widens the wings even if spot volatility barely moves. It is what VVIX measures for the CBOE VIX, and it spikes when the outlook grows genuinely uncertain.
Volatility
The degree to which a price fluctuates over time, the core subject of options pricing and risk. Measured statistically as the standard deviation of returns, it says nothing about direction, only magnitude. It splits into realised volatility, what actually happened, and implied volatility, what the market expects next.
See: What is Volatility? · Historical Volatility · Implied Volatility
Volatility Arbitrage
Trading the gap between an option's implied volatility and the volatility you expect to be realised, hedged to stay direction-neutral. If you think implied is too high you sell and delta-hedge, harvesting the difference if realised comes in lower. The catch is that hedging is imperfect and a wrong volatility view still costs money, so it is far from a free lunch.
See: Volatility Arbitrage · HV vs IV · Delta Hedging
Volatility Cone
A chart plotting the historical range of realised volatility across different measurement windows, from short to long. It shows where current implied or realised volatility sits versus its own past for each horizon. Traders use it to judge whether options look cheap or dear on the timeframe they care about.
Volatility Curve
Another name for the plot of implied volatility across expiries, the shape of the term structure. Its slope, contango or backwardation, and any event bumps summarise where the market expects movement to concentrate. Traders position along the curve using calendar spreads and vega bucketing.
See: Volatility Curve · What is Term Structure? · Calendar Structure
Volatility of Volatility
Also: Vol-of-vol
How much volatility itself bounces around, the parameter that governs how curved a smile is. When vol-of-vol is high, the wings of the smile lift because extreme volatility outcomes become more likely. VVIX is the market's traded gauge of it on the CBOE VIX.
See: VVIX · Volatility Smile · CBOE VIX
Volatility Surface
The full three-dimensional map of implied volatility across strikes and expiries at one moment. Its two cross-sections are the smile, across strikes, and the term structure, across time. Arbitrage-free surfaces must respect butterfly and calendar conditions, which is what keeps a quoted surface internally consistent.
See: Volatility Surface · Volatility Smile · What is Term Structure?
Vomma
Also: Volga
A second-order Greek measuring how vega changes as implied volatility moves; it is the convexity of an option in volatility. Out-of-the-money options carry high vomma, so they gain vega as volatility rises, amplifying long-volatility payoffs. Traders who want exposure to vol-of-vol seek positive vomma.
See: IV and Vega · VVIX · Long Vega
VVIX
The CBOE index of the volatility of the VIX itself, derived from VIX option prices. It is the market's traded measure of vol-of-vol and tends to jump ahead of, or alongside, spikes in the VIX. A high VVIX warns that even volatility is becoming unstable, a sign of stress about stress.
See: VVIX · CBOE VIX · Fear Index
W
Weekly Expiry
Options that expire each week rather than monthly, dominant in Indian index trading. Their short life makes them intensely gamma- and theta-driven, so premiums decay fast and swing hard near the strike. The compressed timeline magnifies both the reward and the risk of any volatility position.
Z
Zero-Days-to-Expiry
Also: 0DTE
Trading options on their final day, when time value collapses and gamma near the strike becomes extreme. Tiny moves in the underlying cause violent percentage swings in premium, so positions must be watched minute by minute. In India, expiry-day index trading is the local face of this phenomenon.