What Is Implied Volatility?
Why options cost more before earnings and what you can do about it
What Is Implied Volatility?
Implied volatility (IV) is the market's forecast of how much a stock is likely to move over a given period. It is expressed as an annualized percentage. An IV of 30% means the market expects the stock to move roughly 30% over the next year (or about 1.7% per day).
IV is "implied" because it is derived from option prices. When traders are willing to pay more for options, IV rises. When demand drops, IV falls.
Why IV Matters
IV is the single most important factor in option pricing after the stock price itself. Two options with identical strike prices and expirations can have very different prices depending on IV. High IV means expensive options. Low IV means cheap options.
IV Rank and IV Percentile
IV Rank tells you where current IV stands relative to its range over the past year. If IV ranged from 20% to 60% and is currently at 30%, the IV Rank is 25% — meaning IV is in the lower quarter of its recent range.
IV Percentile tells you what percentage of days in the past year had a lower IV than today. Both metrics help you determine whether options are relatively cheap or expensive.
Trading IV
When IV is high, option sellers have an edge — premiums are inflated and likely to shrink. When IV is low, option buyers may find bargains. Understanding IV helps you choose the right strategy for market conditions.
Key Terms
Implied Volatility (IV) — The market's expected magnitude of price movement
IV Rank — Current IV relative to its 52-week high-low range
IV Crush — A sharp drop in IV, typically after earnings or other catalysts
Vega — The Greek that measures an option's sensitivity to changes in IV