Intermediate · 6 min read

Implied volatility

What IV means, why premiums rise before events, and why IV can fall even when you were right on direction.

Implied volatility (IV) is the level of volatility that the option's current market price implies, using an option pricing model. It is not a forecast guaranteed to come true; it reflects what buyers and sellers are paying for uncertainty.

What moves IV

• Scheduled events (results, policy announcements, elections, budget) often lift IV beforehand.
• Sharp falls in the market tend to raise IV; calm rising markets often see IV drift lower.
• IV usually differs between strikes and expiries.

IV crush

After a much-awaited event the uncertainty is gone and IV can drop quickly. Option prices fall with it, even if the underlying moved the way a buyer hoped. A buyer's gain from direction can be reduced or wiped out by the drop in vega value.

Using IV sensibly

• Comparing today's IV with its own recent history gives context (an 'IV percentile' or 'IV rank' does this). Remember this terminal does not store shared historical IV for you.
• High IV makes options expensive for buyers and richer for sellers, but richer premium exists because the market sees larger risk.

Caution. High IV does not mean 'sell' and low IV does not mean 'buy'. IV is one input among many, and short positions in high-IV markets can lose heavily if the move is large.