Implied Volatility Explained
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. Read IV right and you buy and sell options at the right moment; miss it and you overpay.
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What IV actually tells you
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.
IV rank and IV percentile
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).
IV crush around earnings
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.
- IV is expected movement, not direction, priced into options.
- Expected move ≈ price × IV × √(days/365).
- Use IV rank/percentile to judge cheap vs expensive.
- IV spikes before earnings and crushes right after.
Frequently asked questions
Does high IV mean the stock will move a lot?
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.
Should I buy or sell options when IV is high?
High IV generally favours selling premium (credit spreads, iron condors), while low IV favours buying options. Always weigh this against your directional view.
What is IV crush?
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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