What Is Implied Volatility?

Implied volatility is the options market's own forecast of how much a stock might move — priced in today, not measured after the fact.

What implied volatility actually is

Implied volatility (IV) is not a measurement of what a stock has done — it's a market-derived estimate of how much a stock is expected to move, in either direction, over a given period. It's expressed as an annualized percentage and it's baked into the price of every option on the exchange. When traders bid options up or down, they're not just voting on direction; they're voting on how turbulent the ride will be.

A stock trading at $100 with 20% annualized IV implies the market expects it to trade within roughly a one-standard-deviation range of about $80 to $120 over the next year, based on the option-implied distribution. Higher IV means pricier options, because the odds of a big move — which help option buyers — go up.

Implied vs. historical volatility

Historical volatility, sometimes called realized volatility, looks backward — it's calculated directly from a stock's actual past price changes over some window, say the last 20 or 60 trading days. Implied volatility looks forward. It reflects what option buyers and sellers currently expect, not what already happened.

The two often diverge, and the gap is informative. When IV sits well above realized volatility, the options market is pricing in more turbulence than the stock has recently shown, often ahead of a known event. When IV sits below realized vol, the market is betting things calm down. Neither measure predicts the other with precision; they're just different lenses on the same asset.

How IV is derived from option prices

IV isn't observed directly — it's backed out. Every standard options-pricing model, Black-Scholes being the classic example, takes volatility as an input and produces a theoretical option price as output. Traders reverse this: they take the actual market price of an option, along with the known inputs (strike, time to expiration, interest rate, underlying price), and solve for whatever volatility number makes the model produce that market price. That number is the implied volatility.

Because every strike and expiration trades at its own price, each one carries its own IV, producing the shape traders call a volatility surface or skew, rather than one single number for a stock.

IV crush around earnings

Implied volatility tends to climb into a known catalyst like an earnings report, because uncertainty about the outcome is genuinely higher and option buyers are willing to pay for that. Once the report hits and the uncertainty resolves, IV collapses almost immediately, regardless of which way the stock moved. That collapse is what traders call IV crush.

This is why buying options purely to bet on an earnings move is trickier than it looks: even a stock that moves in the anticipated direction can leave an option holder with a loss, because the drop in implied volatility erases value faster than the price move adds it back.

IV and the VIX

The VIX is essentially implied volatility applied to the whole market rather than a single stock. It's built from a basket of S&P 500 index option prices and represents the market's expected annualized volatility over the next 30 days. When the VIX rises, it typically means index option buyers are paying up for protection or exposure to a bigger expected move — a sign of rising uncertainty across the market, not just one name.