Implied Volatility
The market's forward-looking expectation of volatility, derived by solving the options pricing model for the volatility that matches the observed premium.
Formula
Black-Scholes price(σ_IV) = Market Premium → solve for σ_IV
Implied volatility (IV) is the volatility figure that, when plugged into an options pricing model (Black-Scholes or similar), produces the option's observed market price. It is forward-looking — it reflects what the market expects price variability to be over the option's life.
High IV inflates premiums; low IV compresses them. Traders monitor IV relative to its own history (IV rank / IV percentile) to assess whether options are cheap or expensive.
IV spikes around earnings, macro events, and market dislocations. Selling volatility (short premium) when IV is elevated and buying when it is depressed is a core institutional strategy.
Related Terms
At the Money (ATM)
An option whose strike price equals (or is very close to) the current spot price of the underlying.
IntermediateBlack-Scholes Model
The foundational closed-form formula for pricing European options from spot, strike, time, interest rate, and volatility.
AdvancedCalendar Spread (Options)
Sell a near-dated option and buy a longer-dated option at the same strike. Profits from faster near-term theta decay and favorable IV term structure.
IntermediateGamma
The rate of change of delta per $1 move in the underlying — it measures how fast delta itself accelerates.
AdvancedIron Condor
A four-leg options strategy that sells an OTM call spread and an OTM put spread simultaneously, profiting when the underlying stays range-bound.
AdvancedMax Pain
The strike price at which the largest dollar value of options (calls + puts combined) would expire worthless — the theory being that price gravitates there into expiry as dealers delta-hedge.
AdvancedOpen Interest (Options)
The total number of outstanding (unclosed) option contracts at a given strike and expiry. Rising OI confirms new money entering; it gauges liquidity and where positioning is concentrated.
IntermediateOptions Chain
The quoted matrix of all available calls and puts for a given underlying, organized by strike and expiration date, showing bid/ask, IV, volume, and open interest.
BeginnerPremium
The price paid by the option buyer to the option seller for the rights granted by the contract.
IntermediateStraddle
An options strategy involving the simultaneous purchase (or sale) of a call and a put at the same strike and expiration, betting on large moves (or low volatility).
AdvancedStrangle
An options strategy buying (or selling) an OTM call and OTM put at different strikes but the same expiration, cheaper than a straddle but requiring a larger move to profit.
AdvancedThe Greeks
The collective name for the sensitivity measures — delta, gamma, theta, vega, rho — that describe how an option's price responds to changes in market variables.
IntermediateTheta
The daily rate of time value erosion in an option's price, assuming all else stays constant. Usually negative for long options.
IntermediateTime Value
The portion of an option's premium beyond its intrinsic value, reflecting the probability that the option moves further in the money before expiry.
IntermediateVega
The sensitivity of an option's price to a 1-percentage-point change in implied volatility.
AdvancedVolatility Skew
The pattern in which implied volatility varies across strikes at the same expiration, usually with OTM puts pricing higher IV than OTM calls.
Advanced