Financial Glossary
Implied Volatility
The market's forward-looking forecast of future price movement, derived from option market prices.
What is Implied Volatility?
Implied volatility (IV) is the market's forecast of how much an asset's price will fluctuate in the future, expressed as an annualized percentage. It's 'implied' because it's derived backward from option prices—brokers and data providers run option pricing models (like Black-Scholes) in reverse, inputting the market price of an option and solving for what volatility would produce that price.
High IV means the market expects large price swings; low IV means small swings. IV is not a prediction of direction—high IV doesn't mean the market expects the stock to rise or fall, only that it expects movement. Two stocks could both have 20% IV but one rises and one falls; IV only forecasts magnitude, not direction.
Historical vs. Implied Volatility
Historical volatility (HV) measures how much an asset actually moved in the past—it's backward-looking and objective. Implied volatility is forward-looking and based on market sentiment. An asset can have low HV (didn't move much recently) but high IV (market expects big moves ahead). These divergences are where traders find opportunities: high IV relative to HV suggests options are expensive; low IV relative to HV suggests they're cheap.
Disclaimer: Implied volatility is an estimate, not a guarantee. Real future volatility may differ substantially from current IV levels. IV changes dynamically with market conditions and can spike or crash without warning. Before making options trading decisions, consult a qualified financial advisor. Options involve substantial risk.