What Is Implied Volatility (IV)?
Implied Volatility is the volatility level implied by options market prices. When options traders expect bigger price swings, options become more expensive, which translates to higher IV.
IV is forward-looking — it reflects what the market expects, not what has happened. Historical volatility (HV) measures past movement; IV predicts future. They often diverge, especially before known events (earnings, FOMC).
Practical implications:
- High IV = options are expensive. Better to sell premium than buy. - Low IV = options are cheap. Better to buy options than sell. - IV spikes before earnings, then crashes after the announcement regardless of the move's direction. This is the IV crush — a major reason new options traders lose money on "earnings plays."
The VIX is a specific measure of S&P 500 implied volatility over the next 30 days. It's widely watched as a "fear gauge" — VIX above 30 signals broad market anxiety, below 15 signals complacency.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Volatility — A statistical measure of how much an asset's price varies over a period.
- VIX (Volatility Index) — The 'fear index' measuring expected 30-day volatility of the S&P 500.