Implied volatility (IV) is the market’s estimate of how much a stock is likely to move. When traders expect a big move, options get more expensive. When the event passes, that extra value can disappear overnight. Understanding IV is the difference between buying options at a fair price and overpaying.
What implied volatility means
IV is shown as a yearly percentage. An IV of 30% means the market is pricing in roughly a 30% move up or down over a year, for about one standard deviation. You do not need to calculate it. What matters is whether it is high or low compared with that stock’s own history.
IV crush around earnings
Before an earnings report, uncertainty is high, so IV rises and options get expensive. Right after the report, the uncertainty is gone and IV falls sharply. This drop is called IV crush.
Right direction, still a loss Common trap
A stock trades at $100 before earnings, and the market expects about an $8 move. You buy a call. The stock rises $4 after the report. That is the right direction, but smaller than the market expected, so the drop in IV can wipe out the gain from the price move and your call may be worth less than you paid.
Useful IV tools
| Tool | What it tells you |
|---|---|
| IV rank | Where today’s IV sits between its lowest and highest level over the past year (0–100) |
| IV percentile | The share of days in the past year when IV was lower than today |
| Expected move | The move the options market is pricing in, often shown by brokers before earnings |
How to use it
- High IV: options are expensive. Buying them needs a bigger move. Selling strategies, or spreads that offset the cost, are often considered instead.
- Low IV: options are cheaper, so buying them is less of a handicap, though low IV can stay low for a long time.
- Before events: check the expected move. If you do not expect a bigger move than that, buying options is a poor bet.
Conclusion
Every option price includes a bet on volatility. Check IV before you trade, especially near earnings, and read our guide to the Greeks to see how vega measures this risk.
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