What is Implied Volatility (IV)?
The market's expectation of future price movement derived from option prices.
📖 Complete Definition
Implied volatility represents the market's forecast of likely price movement, expressed as an annualized percentage. Unlike historical volatility (actual past movement), IV is forward-looking and derived from option prices using models like Black-Scholes. High IV means expensive options and expected large moves; low IV means cheap options and expected calm markets.
💡 Examples
- →IV of 30% implies the market expects the stock to move about 30% over the next year
- →IV typically spikes before earnings and drops afterward
❓ Frequently Asked Questions
How do I use implied volatility in trading?
Compare current IV to historical levels using IV Rank or IV Percentile. Sell options when IV is high (expensive), buy when IV is low (cheap).
Why does IV increase before earnings?
Uncertainty about earnings results increases demand for options protection and speculation, driving up IV. After the announcement, uncertainty resolves and IV drops.
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