Implied Volatility
The market’s expectation of future price movement, derived from option prices.
Also called: iv · vol crush · iv crush
Written by Javier Sánchez Ros
In plain language
Implied volatility is backed out of option prices rather than measured from history. It is the volatility the market is currently pricing in.
High IV means expensive options. It typically rises ahead of known events — earnings, decisions, product announcements — and collapses immediately afterward.
That collapse, often called IV crush, can produce a loss on a correctly predicted move because the premium deflated faster than the price gained.
Worked through
The same strike at 28% IV and at 71% IV
- At 28% IV
- premium $1.15
- At 71% IV
- premium $2.95
- Strike, expiry, stock
- identical
- Extra move needed to break even
- much larger
Same contract, same underlying, same date — and more than twice the price. The difference is entirely the market’s estimate of how much the stock will move, and that estimate is baked into what you pay.
Implied volatility is therefore not a forecast you can act on directly; it is the price of the trade. Buying at 71% means the move has to be bigger than the already-elevated expectation in order to pay, which is a much harder claim than simply "this goes up".
The useful comparison is against the same instrument’s own history rather than against other stocks. A biotech at 60% may be quiet by its standards while a utility at 60% is extraordinary, so the question is always whether IV is high or low for this thing.
It also determines which side of the trade makes sense. High IV favours selling premium, low IV favours buying it — and a trader who only ever buys options is, by construction, paying whatever the market is asking regardless of whether it is cheap.
Why it matters
IV determines whether you are buying options cheaply or expensively. Ignoring it means you may be right about direction and still lose.
Common mistakes
- Buying options into an event without checking whether IV is already elevated.
- Comparing IV levels across instruments without reference to their own historical range.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
How much an option’s price changes for a one-point move in implied volatility.
The price paid for an options contract.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
How much and how quickly an asset’s price moves over a given period.
A company’s scheduled quarterly disclosure of financial results.