Implied Volatility

Implied volatility (IV)The market’s forecast of future movement, baked into option prices. is arguably the single most useful number in optionsThe right, not the obligation, to buy or sell at a set price.. Here’s the clever twist: instead of using Black-Scholes forward (inputs → price), the market runs it backward. We can see the optionThe right, not the obligation, to buy or sell at a set price.’s actual market price, so we ask: “what volatilityThe size of price swings — not their direction. would the formula need to produce this price?” That number is the implied volatilityThe size of price swings — not their direction..

• Definition — the volatilityThe size of price swings — not their direction. figure that makes a pricing model output the optionThe right, not the obligation, to buy or sell at a set price.’s actual market price (the model run backward).
• It’s a forecast — IVThe market’s forecast of future movement, baked into option prices. reflects *expected futureA binding agreement to buy or sell at a set price on a future date.* movement, not past (realised) volatilityThe size of price swings — not their direction.; the two can differ.
• Drives premium directly — high IVThe market’s forecast of future movement, baked into option prices. inflates premiums (great to sell, costly to buy); low IVThe market’s forecast of future movement, baked into option prices. deflates them (cheap to buy). This is the lever behind vegaHow much an option’s price changes when volatility changes. and the volatilityThe size of price swings — not their direction. crush.