What is implied volatility?
What does IV actually tell you about an option?
Implied volatility (IV) is the market's expectation of future movement, as priced into the option. It is not a forecast of direction and it is not a fixed measurement. When IV rises options usually get more expensive; when it falls their time value component often shrinks. The effect depends on the individual leg.
Where IV comes from
Implied volatility is not measured, it is backed out. You take the option’s observed market price, put it into a pricing model, and solve for the volatility that reproduces exactly that price. That makes it a property of the price, not of the underlying — every strike and every expiration can carry its own IV. Volatility skew and term structure are the names for that.
Because the model produces the valuation, IV inherits the model’s assumptions. Different models and different rate assumptions return slightly different numbers for the same option. Within one platform that hardly matters; comparing IV across two data sources is where it starts to.
What high and low readings mean
IV is quoted as an annualised percentage. Thirty percent means the model is pricing a one-standard-deviation move of roughly thirty percent of the share price over a year. For one specific expiration, that converts into the expected move. In isolation the number says little: thirty percent is high for a utility and low for a biotech, which is why IV rank exists.
The number only becomes comparable in context: against its own history through IV rank, against what the underlying actually did through historical volatility, and against other expirations through term structure. Those three comparisons are what turn a percentage into a statement about how richly an option is priced.
The common misreading
High IV says nothing about whether the price will rise or fall. IV has no direction; it prices movement. The second error is reading high IV as an automatic selling opportunity. It is often high because an event is coming that can genuinely deliver the move — the premium is not overpriced, it is paid for a real risk.
Strategies where the term matters
- Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?
- Long Straddle — Does the move have to be bigger than the one the market has already priced in?
Related terms
Every term in one place: the options glossary.
This material is general information about option strategies, written for a general audience. It is not investment advice, not a recommendation, and not financial analysis. Options can lose their entire value, and uncovered positions can lose more than the amount committed. Anything said about tax is general in nature and is no substitute for professional tax advice. Last reviewed: 2026-08-06.