Implied volatility (IV) is the level of future volatility the market is pricing into an option, worked backward from the option's price with a pricing model such as Black-Scholes. It is quoted as an annualized percentage and describes the size of the moves the market is paying for, not their direction.
How it works
An option's price depends on the share price, the strike, the time to expiry, interest rates, dividends and volatility. Everything except volatility can be observed directly. Implied volatility is the one number that, fed into the model, reproduces the price at which the option actually trades. When buyers bid options up, IV rises; when sellers dominate, it falls.
Because IV is annualized, it converts into an approximate one-standard-deviation move for any horizon:
- Move over T days ≈ share price × IV × √(T ÷ 365)
- Daily move ≈ IV ÷ 16 (16 is roughly √252, the number of trading days in a year)
Under the model's assumptions, about two-thirds of outcomes fall inside that range. The expected move quoted for a stock is usually taken from the price of an at-the-money straddle, which lands close to the same figure.
Every strike and expiry has its own IV. Headline figures such as IV30 blend nearby contracts into a constant 30-day measure, the same idea behind the VIX for the S&P 500. How IV varies across strikes is the volatility skew; how it varies across expiries is the term structure.
How to read it
- Against its own history. An IV of 40% is high for a utility and low for a small biotech. IV rank places today's reading within the past year's range: (current IV − 52-week low) ÷ (52-week high − 52-week low). A rank of 0 is the cheapest level of the year, 100 the most expensive.
- Against realized movement. Comparing IV with how much the stock has actually moved shows whether options look rich or cheap. See historical vs implied volatility.
- Around events. IV usually climbs into earnings and other scheduled events, then drops once the news is out. That drop is IV crush.
- Through the Greeks. Vega measures how much an option's price changes for a one-point change in IV. Long options gain when IV rises; short options gain when it falls. See the options Greeks.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $100 and its 30-day IV is 32%.
- One-standard-deviation move over 30 days: 100 × 0.32 × √(30 ÷ 365) ≈ $9, a range of roughly $91 to $109.
- Daily move: 32% ÷ 16 ≈ 2%, or about $2 a day.
- If IV rises to 40% with the share price unchanged, an at-the-money 30-day option with a vega of about $0.11 gains roughly 8 × $0.11 ≈ $0.90 per share, or about $90 per contract.
The same 32% says nothing about whether the stock is more likely to finish at $91 or at $109. It only prices the width of the range.
Limitations and common mistakes
- IV is a price, not a forecast. It contains a premium for risk and reflects supply and demand for options; it does not guarantee how far the stock will move.
- The normal-distribution range understates the tails. Gaps on news, earnings and market shocks happen more often than the model implies.
- High IV is not automatically a reason to sell options. It is often high for a reason, such as a pending earnings report, a court ruling or a takeover situation.
- Thin contracts give noisy readings. Wide bid/ask spreads on illiquid strikes can produce IV figures at which no trade would actually fill.
- Direction is not in the number. Rising IV can accompany a rally or a sell-off; for broad indices it usually rises when prices fall.
In Clear Tape
On the Options page, the free SPY, QQQ and IWM index cards show the expected move for the week alongside skew and term structure. Pro members can analyze any stock with listed options: the header shows IV30 and its change on the day, and the Skew and volatility panel adds 20- and 60-day realized volatility, the ratio of IV to realized volatility and a one-year IV rank, which appears once 60 days of history have been collected. The watchlist scan lists IV30 and its daily change for every stock on your watchlist and flags a rise of three points or more. Member data reflects the previous session's close from Cboe delayed quotes, not live prices. See pricing for what each plan includes.
For educational purposes only. Not investment advice.