Implied volatility (IV)

The volatility the market is pricing into an option — how big a move it expects; high IV makes options expensive.

Implied volatility (IV) is the market's forecast of how much a stock might move, extracted from the price of its options. It doesn't tell you which direction the stock will go, only how big the swings are expected to be. When IV is high, options are expensive because buyers are paying up for the chance of a large move; when IV is low, premium is cheap.

In practice traders compare current IV against its own history, often using IV rank or IV percentile. If a stock normally trades at 25% IV but sits at 60% before earnings, options are pricey and you might lean toward selling premium rather than buying it. After the event IV usually collapses, a drop known as IV crush.

A common mistake is buying a call the day before earnings because you expect the stock to rise. Even if you're right about the direction, the post-earnings IV crush can shrink the premium so much that you still lose. Vega tells you how much your position gains or loses per one point change in IV, so always know whether you're long or short volatility.

← Back to the glossary · Guides · Strategies

All options terms

Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.