Implied Volatility Explainer
Implied volatility is inferred from an option’s market price rather than observed directly. Traders insert the premium and other known inputs into a pricing model, then solve for the volatility assumption that reconciles the model with the quoted value.
A higher implied volatility generally supports a higher premium because a wider range of future outcomes increases the value of optionality. The measure is typically annualized, and it describes magnitude rather than direction: a high reading does not say whether the asset will rise or fall.
Implied volatility varies across strikes and expirations, forming a surface rather than one universal number. Earnings, policy decisions, litigation, supply and demand, crash protection, and scheduled events can create skew, term-structure differences, or a sharp drop after uncertainty resolves.
Realized volatility measures what actually happened, so it can differ materially from what options had implied. Comparisons should use consistent horizons and definitions. Investors also need to consider spreads, model assumptions, dividends, rates, and sparse trading before treating a quoted volatility as precise.
Implied volatility is the model input consistent with the premium.
It is not a directly observed company statistic.
Higher readings imply a wider expected range.
They do not choose up or down.
Skew and term structure reflect demand and event risk.
One contract may not represent the whole market.
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