Here is a correction to the textbook, and it is the whole story of today. Yesterday the RBI held, repo unchanged at 5.25 percent, a neutral stance. Everyone will tell you that after a boring hold like that, volatility collapses, the classic IV crush. Look at your screen. It did not. The Sensex volatility is not falling, it is rising. The expiry straddle is staying fat and the vol gauge is popping. And there is a very specific reason: today is the first ever Sensex weekly expiry that settles under the new single auction close, the same auction that misfired twice on the Nifty this week. Nobody has ever seen this settlement. And when the market does not know how it is going to close, it does not sell insurance, it buys it. That is why the vol is going up, not down, into the one session it should be falling.

Let me make the risk concrete. The  ...