🌪️ Stock Option Implied Volatility (IV)

Definition

Implied Volatility (IV) reflects the market’s expectation of how much the underlying stock will fluctuate over the life of the option.
It’s derived from option prices using models like Black-Scholes, and expressed as an annualized percentage.

Why It Matters

Pricing Insight: Higher IV means options are more expensive due to anticipated volatility.
Market Sentiment: IV rises in uncertain or news-driven environments, signaling fear or excitement.
Strategy Selection: Traders use IV to choose between buying or selling options based on expected movement.

Example

Suppose a stock is trading at $100 and a 30-day call option is priced with an implied volatility of 40%.
This suggests the market expects the stock to move roughly $25.40 up or down over the next month:
Expected Move ≈ $100 × 40% × √(30/365) ≈ $25.40

Key Insights

IV Level	Market Interpretation	Trading Implication
High IV	Uncertainty, earnings, news events	Options are expensive; selling strategies may benefit
Low IV	Calm, stable market	Options are cheaper; buying strategies may benefit
IV vs. Historical Volatility	IV is forward-looking; historical is backward-looking	Discrepancy can signal mispricing opportunities