Implied volatility
TradingDefinition
The volatility "implied" by an option's current market price, calculated by reverse-engineering the Black-Scholes formula. It is the market's forecast of how much the underlying will move between now and expiration — different from realized (historical) volatility.
IV rises before earnings, FOMC meetings, and political events. It tends to be higher than realized vol on average (the "volatility risk premium"), which is why option sellers earn a long-run premium.
IV rises before earnings, FOMC meetings, and political events. It tends to be higher than realized vol on average (the "volatility risk premium"), which is why option sellers earn a long-run premium.
Example
AAPL stock options before an earnings release might show IV of 45%; after earnings it crashes back to 25%. This "IV crush" is why long calls / puts often lose money even when the stock moves the predicted direction.