implied volatility
The market's forecast of likely price movement derived from options prices, representing the expected volatility of an asset over the option's life.
Example
“When implied volatility spiked before earnings, option prices became expensive — the market expected a large price move.”
Memory Tip
IMPLIED volatility = what the options MARKET IMPLIES about future price swings.
Why It Matters
Implied volatility helps investors understand how much market participants expect an asset to move, which directly affects option prices and risk assessment. Understanding this metric allows you to make more informed decisions about whether options are expensive or cheap relative to historical price swings.
Common Misconception
Many people believe implied volatility predicts the direction of price movement, but it only measures the expected magnitude of movement regardless of direction. High implied volatility means big moves are expected, but the market is not forecasting whether prices will go up or down.
In Practice
If a stock trading at 100 dollars has an implied volatility of 20 percent, the market expects the stock to move roughly 20 dollars over one year based on options pricing. If that same stock later shows an implied volatility of 40 percent, call and put options become significantly more expensive because traders are pricing in double the expected price movement.
Etymology
IMPLIED (suggested by market prices) VOLATILITY (price fluctuation). The volatility IMPLIED by current option prices.
Common Misspellings
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