Implied volatility (IV) is the market’s estimate of how much the underlying will move in the future, worked back from current option prices. Higher IV means higher premiums for both calls and puts.
Historical vs implied volatility
Historical volatility looks backwards at how much the price actually moved. Implied volatility looks forward and reflects supply and demand for options. When traders rush to buy protection, IV rises even if the stock has been calm.
IV crush
Before scheduled events such as earnings or policy announcements, IV usually climbs because nobody knows the outcome. Once the news is out, uncertainty disappears and IV falls quickly. This drop, called IV crush, can make an option lose value even when the stock moves in the direction the buyer expected.
How traders use IV
- Compare current IV with its own range over the past year (IV rank or IV percentile).
- When IV is relatively high, strategies that sell premium are paid more for the same risk.
- When IV is relatively low, buying options is cheaper, but you still need the move to happen in time.
- India VIX and the CBOE VIX give a quick read on overall market volatility.
IV is not a prediction of direction. It only tells you how big the market thinks the move may be.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.