Curriculum·R406 Options and Structured Positions·about 42 min
Implied volatility
By the end of this lesson you can
- →Explain what implied volatility is, and why it is a price rather than a forecast
- →Convert an annualised volatility into an expected move over any horizon
- →Compute the loss from a volatility collapse on a position that was directionally correct
- →Describe the variance risk premium and what it costs the side collecting it
Senior · enrolled learners
This lesson opens with The VIX record, 16 March 2020.
- What happened
- The VIX measures the 30-day implied volatility of S&P 500 options, expressed in annualised percentage terms. On 16 March 2020, during the first weeks of the COVID-19 market dislocation, it closed at 82.69, the highest close in its history, surpassing the 80.74 recorded on 21 November 2008. It reached 83.56 intraday that session, below the intraday record of 89.53 set on 24 October 2008. A close of 82.69 corresponds to a market pricing a daily move of about 5.2 percent, against roughly 0.9 percent at a VIX of 15. Within months the index had fallen back toward ordinary levels, so anybody who bought options at those prices and held them was paying for a distribution the market stopped expecting.
- The decision point
- Implied volatility is not a prediction that anybody made. It is the number that makes a pricing model reproduce the price the market is actually charging, so it is a quoted price expressed in volatility units. Buying protection when it reads 82.69 is buying at the most expensive level ever recorded, and the position can be directionally correct and still lose, because the price of the volatility you bought falls faster than the direction pays.
What you will be able to answer
- →What is implied volatility?
- →How do you convert it to a daily move?
- →What does a volatility collapse cost?
- →What is the variance risk premium?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.cnbc.com/2020/03/16/wall-streets-fear-gauge-hits-highest-level-ever.html
- https://www.macroption.com/vix-all-time-high/
- https://www.cboe.com/insights/posts/inside-volatility-trading-nothing-remains-unchanged/
- https://www.bloomberg.com/news/articles/2020-03-16/stock-market-volatility-tops-financial-crisis-with-vix-at-record
Confidence high·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
Intraday VIX figures for 16 March 2020 are reported between about 83.5 and 85.5 depending on the feed and the exact timestamp, while the closing figure of 82.69 is unambiguous. The lesson uses the close for all arithmetic and states the intraday range as reported.
The 252 trading days used in the square-root conversion is the standard equity market convention. Markets that trade continuously, per S201-05, use 365, which changes the daily figure by a factor of about 1.2. State which convention a quoted volatility uses before comparing two of them.
The variance risk premium is well documented in equity index options over long samples and is neither constant nor guaranteed, and its size in crypto option markets differs and moves. Treat the direction as the durable finding and any magnitude as a measurement to be repeated.