Options Glossary
Implied volatility, often shortened to IV, is the market's forecast of how much a stock is likely to move, expressed as a percentage and priced directly into an option's premium. It doesn't predict direction — only the expected size of future price swings.
Every option has a price, and that price can be run backward through an options pricing model (such as Black-Scholes) to solve for the volatility level the market is implicitly assuming. That derived number is implied volatility. Higher IV means the market expects bigger price swings and options cost more; lower IV means the market expects calmer price action and options cost less.
Historical volatility looks backward at how much a stock has actually moved. Implied volatility looks forward at how much the options market expects it to move. The two are often close but can diverge sharply around known catalysts like earnings reports, where IV typically rises in anticipation of a large move and then drops sharply afterward — a pattern traders call "volatility crush."
IV is a major driver of option premium, separate from the stock's price and the strike you choose. Buying options when IV is unusually high means paying a premium for volatility that may not materialize. Selling options when IV is high — as with a cash-secured put — means collecting a richer premium for taking on that same risk. Comparing IV to a stock's own recent history is one of the most common ways traders decide whether options on that stock are "expensive" or "cheap" right now.
Traders check IV before choosing between buying and selling strategies, before deciding whether to hold options through an earnings report, and when comparing similar trades across different stocks, since two stocks at the same price can have very differently priced options if their implied volatility levels differ.