Implied Volatility
Definition
Implied volatility (IV) is the market's forward-looking estimate of how much a stock will move, derived from current option prices — high IV means options are expensive because the market expects big moves, low IV means options are cheap because the market expects quiet trading.
Example
“The stock had earnings in three days and IV had jumped to 140% — I wasn't touching those options as a buyer. Let the event pass and IV crush happen first.”
Detailed Explanation
Implied volatility doesn't predict direction — it predicts magnitude. A stock with IV at 80% is saying the market expects large moves, but it's not saying up or down. Options on that stock are priced as if volatility will be high, which means you're paying a premium for that uncertainty. As a buyer, you need the stock to move enough to overcome that premium; as a seller, you're collecting premium and hoping the actual move is smaller than what IV priced in.
IV is expressed as an annualized percentage and relates to the expected one-standard-deviation move over a given period. An IV of 50% means the market implies roughly a 3.1% daily move (50 ÷ √252 ≈ 3.15%). The more useful number is the implied move over a specific event — options pricing ahead of earnings often implies a ±8% or ±15% move, and you can calculate that directly from the at-the-money straddle price. If the market implies an 8% move and the stock only moves 3%, short premium positions win.
IV relative to its own history matters more than the absolute number. A stock with IV at 60% might be cheap if its historical range is 80–120%, or expensive if it usually sits at 20–30%. The IV Rank (IVR) and IV Percentile metrics quantify this — they tell you where current IV sits relative to its 52-week range. High IVR (above 50%) generally favors selling premium; low IVR generally favors buying it. Understanding this relationship is fundamental to options trading beyond simply picking direction.