RiskPicksWhat is Implied Volatility?
Implied volatility (IV) is a number derived from options prices that tells you how much the market expects a stock to move over a given time period. It does not predict direction (up or down), only the size of the expected move. High IV means the market expects a large move. Low IV means calm is expected.
Where IV comes from
Options prices are based on several factors: stock price, strike price, time until expiration, interest rates, and volatility. IV is the volatility number that is "implied" by the current options price. If options are expensive, IV is high (market expects a big move). If options are cheap, IV is low.
IV Crush
IV typically spikes before known events (earnings reports, FDA decisions, product launches) because uncertainty is high. After the event, uncertainty is resolved and IV drops sharply. This is called IV crush.
- Before earnings: IV is elevated. Options are expensive
- After earnings: IV collapses. Options lose value even if the stock moved in your direction
- The trap: a new trader buys call options before earnings, the stock goes up 3%, and they still lose money because IV crush destroyed the option's value
Why stock traders should care
- Expected move: IV tells you the market's expected range. A stock at $100 with 30% IV is expected to move roughly $30 over the next year (or about $1.90 per day)
- Earnings gaps: high IV before earnings means the market is pricing in a big gap. If the actual move is smaller than expected, the stock may barely react even on a beat or miss
- Volatility expansion: when IV starts rising on a stock you are watching, it often means something is coming (news, earnings, an insider knows something)
You do not need to trade options to benefit from understanding IV. If IV is spiking on your stock, the market is telling you a big move is expected. Plan your position size accordingly.