Implied volatility (IV) is the market’s forecast of how much a stock will move, expressed as an annualised percentage and baked into every option’s price. High IV makes options expensive; low IV makes them cheap. Understanding IV is what separates traders who buy and sell options at the right time from those who overpay.
Open the Long Straddle calculator →IV is reverse-engineered from an option’s market price using a model like Black-Scholes. It is a measure of expected movement, not direction — a high IV says the market expects a big move either way.
You can translate it into an expected range: a 30-day IV of 40% implies roughly a 40% ÷ √12 ≈ 11.5% one-standard-deviation move over the next month.
A raw IV number means little on its own. IV rank and IV percentile compare today’s IV to its own past year, telling you whether options are historically cheap or expensive for that stock.
Premium sellers look for high IV rank (rich options to sell), while buyers prefer low IV rank (cheap options to own).
Before events like earnings, IV rises because uncertainty is high. Immediately after the event the uncertainty resolves and IV collapses — the so-called IV crush.
This is why a long straddle bought before earnings can lose money even when the stock moves: the inflated volatility you paid for evaporates the next morning.
It means the market expects a large move and is charging for it. The move may or may not happen — IV is a forecast, not a guarantee.
High IV generally favours selling premium (credit spreads, iron condors), while low IV favours buying options. Always weigh this against your directional view.
The sharp drop in implied volatility right after a scheduled event like earnings, which lowers option prices regardless of the stock’s move.
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