What Is Implied Volatility?
Implied volatility (IV) is the market's forecast of future price movement magnitude, derived from current options prices. Unlike historical volatility (which looks backward), IV is forward-looking — it reflects what options traders are collectively pricing in for future volatility. Higher IV means the market expects bigger moves.
How Implied Volatility Works
IV is extracted from options pricing models (Black-Scholes or similar). When options are expensive (high premiums), IV is high — the market is pricing in significant upcoming moves. When options are cheap, IV is low — calm conditions expected. IV rank (current IV vs its own range over 1 year) contextualizes whether IV is relatively high or low.
Why It Matters for Traders
IV is the single most important metric in options trading. Buying options when IV is low and selling when IV is high is a foundational strategy. For non-options traders, IV spikes before known events (earnings, halving, regulatory decisions) signal expected volatility, while IV crush after events creates opportunities. The DVOL index (crypto's VIX equivalent) tracks Bitcoin's implied volatility.