Implied volatility
Also called: IV
Implied volatility is the size of future price swings that an option's market price implies. High implied volatility means options are expensive because traders expect big moves.
It is found by running an option-pricing model such as Black-Scholes backwards: take the price traders pay and solve for the volatility that produces it.
Implied volatility usually jumps before earnings or other big news and drops after it, which traders call an IV crush.
Related terms
- Volatility: Volatility measures how much and how quickly a price moves up and down, usually as the annualized standard deviation of its returns.
- Black-Scholes model: The Black-Scholes model is a formula for the fair price of a European option using five inputs: the stock price, strike, time to expiry, risk-free interest rate and volatility.
- Option premium: An option's premium is the price paid to buy it.
- Standard deviation: Standard deviation measures how spread out a set of numbers is around its average.
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