Implied Volatility Explained: What Option Prices Say About Future Moves

Implied volatility (IV) is the volatility the options market is pricing in. It is backed out from option prices using a model such as Black-Scholes. When traders expect bigger moves, they pay more for options, and implied volatility rises.

IV as an expected move

IV is quoted as an annualized standard deviation. A rough way to turn it into an expected move:

Expected move ≈ Price × IV × √(Days ÷ 365)

Example: a $100 stock with 30% IV, 30 days to expiration:

$100 × 0.30 × √(30 ÷ 365) ≈ $100 × 0.30 × 0.287 ≈ $8.60.

Under the model's assumptions, that is roughly a one-standard-deviation move: the price stays within about $91.40 to $108.60 around two thirds of the time. Real markets have fatter tails than the model assumes, so large moves happen more often than this suggests.

Implied vs historical volatility

• Historical (realized) volatility measures how much the price actually moved.
• Implied volatility is the market's forecast, plus a premium for uncertainty.

Options often price in somewhat more volatility than is later realized, which is part of why selling options can be profitable on average, and why it carries the risk of sudden large losses.

IV rank and IV percentile

Is 30% IV high? It depends on the stock. Two common measures put IV in context:

• IV rank: where current IV sits between its 52-week low (0) and high (100).
• IV percentile: the share of days in the past year with IV lower than today.

Volatility crush

Before scheduled events such as earnings, IV often rises. After the event, the uncertainty is resolved and IV can fall sharply. Long options can lose value even when the stock moves in the right direction, if the move is smaller than priced in. See straddle vs strangle.

How IV affects strategies

• Long options and debit spreads (positive vega) benefit from rising IV.
• Short options, credit spreads and iron condors (negative vega) benefit from falling IV.

Many traders lean toward buying options when IV is low relative to its history and selling when it is high, but IV can stay high or keep rising, especially in falling markets.

In TradeThink

The open positions page shows the live implied volatility and vega of each option, and the risk profile values later-dated legs with each leg's implied volatility. Related: the options greeks.