Options & Derivatives
Implied Volatility
Implied volatility is baked into option prices. When traders expect big moves, they pay more for options, which pushes implied volatility higher. When they expect calm, option premiums and implied volatility fall.
Unlike historical volatility, which looks backward, implied volatility is forward-looking. It reflects collective expectations about future turbulence, often spiking around earnings reports or major economic events.
Options traders watch implied volatility closely because it drives the cost of contracts. Buying options when it is low and selling when it is high is a core part of many strategies.
Example
Implied volatility often jumps before a company's earnings report as traders brace for a large price swing.
Related terms
Implied Volatility — FAQ
What is Implied Volatility?
Implied volatility is the market's forecast of how much an asset's price will move, derived from the prices investors are paying for its options.
Can you give an example of Implied Volatility?
Implied volatility often jumps before a company's earnings report as traders brace for a large price swing.
Understanding creates conviction.
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