Implied volatility (IV)
TradingDefinition
The market's forecast of how volatile a stock will be over the life of an option, derived backward from the option's price. Higher IV means more expected swings, which makes both calls AND puts more expensive. The VIX is implied volatility on the S&P 500.
IV typically rises before earnings and falls after (the "IV crush"). Selling options when IV is high and buying when low is a classic options strategy — but timing it is harder than it sounds.
IV typically rises before earnings and falls after (the "IV crush"). Selling options when IV is high and buying when low is a classic options strategy — but timing it is harder than it sounds.
Formula
IV solves backward from the Black-Scholes price
Example
A stock trades at $100. With 30% IV, a 30-day at-the-money call costs ~$3.50. With 60% IV (after a scary news event), the same call costs ~$7. The stock didn't move, but the option doubled in price because the market expects bigger swings.