Implied Volatility
Implied volatility (IV) is the market’s forecast of how much an underlying will move, expressed as an annualized percentage and backed out of an option’s price.
IV is the volatility input that, placed into an option-pricing model such as Black–Scholes, reproduces the option’s observed market price. Higher IV means richer premiums and a wider expected range.
IV is forward-looking and differs from realized (historical) volatility, which is measured from past prices. An IV of 20% implies a one-standard-deviation annual move of about 20% in the underlying.
Example. A stock at $100 with 20% IV implies a ≈ ±$20 one-standard-deviation range over a year, or about ±$5.8 over one month (20% × √(1/12) × 100 ≈ 5.77).
FAQ
What does high implied volatility mean?
High IV means the market expects large moves, so option premiums are more expensive; it often rises before earnings and falls afterward.
Is implied volatility the same as historical volatility?
No — IV is the market’s forward expectation embedded in option prices, while historical volatility is computed from realized past returns.
Related terms
See also: Long Straddle