Understanding Implied Volatility

Implied volatility (IV) is one of the most important factors in option pricing. It represents the market's expectation of future price movement in the underlying asset.

IV and Option Premiums

Higher implied volatility = Higher option premiums. This relationship holds true for both calls and puts. When IV increases, options become more expensive. When IV decreases, options become cheaper.

Practical Implications

• Buying options: Generally better when IV is low
• Selling options: Generally better when IV is high

IV Crush

After major events like earnings, IV often drops dramatically. This "IV crush" can hurt long option positions even if the stock moves in your favor.

Measuring Volatility

• VIX: Measures expected volatility of S&P 500
• IV Rank: Compares current IV to historical range
• IV Percentile: Shows what % of days had lower IV