Implied Volatility
Implied volatility (IV) is just the market's mood about how wild prices might get. When everyone's nervous, IV is high and options become expensive — like umbrella prices spiking before a storm. When calm, IV is low and options get cheap. Smart traders buy options when they're cheap and sell them when they're expensive.
Implied volatility is the most misunderstood number in options — and the one professionals actually trade. It is the market’s forecast of how much the underlying will move, backed out of the option price.
IV is a forecast, priced in points
Black-Scholes turns inputs (spot, strike, time, rate, volatility) into a price. Run it backwards — feed in the market price and solve for volatility — and you get implied volatility: the volatility the market is pricing in. An IV of 14% means the market expects the underlying to move about 14% annualised.
High IV = expensive options
When IV is high, every option costs more, because the market expects bigger moves. This is why selling options is attractive in high-IV regimes (you collect fat premiums) and buying is attractive in low-IV regimes (options are cheap). The same strategy can be smart or foolish depending purely on IV.
IV rank and percentile give context
A raw IV number is meaningless without history. IV rank places today’s IV between its 1-year low and high (0–100). IV percentile asks what fraction of days had lower IV. A high reading says "options are expensive relative to the past year" — lean toward selling; a low reading — lean toward buying.
IV vs realised volatility
Realised volatility is how much the underlying actually moved. The structural edge in option selling is that implied volatility usually sits above realised — the market overpays for insurance. When IV is far above RV, sellers have the wind at their back. When IV drops below RV, that edge inverts.