What Is Implied Volatility (IV) and Why It Drives Option Prices

Short answer: Implied volatility (IV) is the market's expectation of how much an underlying will move, expressed as an annualised percentage and derived from the option's price. High IV means expensive options and a wide expected range; low IV means cheap options and a tight range.

Why IV matters more than direction (sometimes)

Two options on the same stock with the same strike and expiry can cost very differently if IV changes. That's because IV is a core input to the option's price (via vega). When IV rises, option premiums inflate — good for holders, bad for sellers. When IV falls (an "IV crush", common after results), premiums deflate — good for sellers.

How traders use IV

• Sellers prefer to sell when IV is rich (relative to recent history), expecting it to fall.
• Buyers prefer low IV, expecting movement or an IV expansion.
• IV across strikes forms the "skew" — comparing it reveals where the market is pricing fear.
• IV vs realised volatility — if implied is consistently above realised, option selling has an edge.

Reading IV in the chain

In the option chain, each strike shows its IV. Don't read it in isolation — compare against the instrument's own recent IV and across expiries. A "high" number only means something relative to context.

IV and the Greeks

IV connects directly to vega (sensitivity to IV) and influences theta and gamma. Get the full picture in our Greeks guide.

FAQ

Is high IV good or bad? Neither — it's context. High IV helps option buyers and hurts sellers (until it falls). It also signals a wider expected range.

What causes an IV crush? A scheduled event (like earnings) resolves, removing uncertainty — IV collapses and premiums drop sharply, often rewarding pre-event sellers.

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