Implied volatility (IV) is the market’s expectation of future price movement, derived from current option prices. It represents the collective forecast of how much the underlying asset will move. Higher IV means options are more expensive; lower IV means they’re cheaper. IV is forward-looking—unlike historical volatility which measures past movement.
- Market’s expectation of future price movement
- Higher IV = more expensive options
- Spikes before events, crashes after (IV crush)
How Implied Volatility Works
IV reflects expected price range:
Implied Volatility Interpretation:
Stock: $100
IV: 30% annually
What this implies (1 standard deviation):
- In one year: Stock expected between $70-$130
- 30% volatility = 30% expected move
Daily volatility ≈ Annual / √252
- 30% / 15.9 ≈ 1.9% daily expected move
High IV Example (60%):
- Stock could move $60 in a year (1 SD)
- Options very expensive
Low IV Example (15%):
- Stock expected to move $15 in year (1 SD)
- Options are cheap
Quick Reference: IV Levels
| IV Rank | Interpretation | Options |
|---|---|---|
| 0-20% | Very low IV | Cheap, favor buying |
| 20-40% | Low-moderate | Fairly priced |
| 40-60% | Moderate | Average |
| 60-80% | High | Expensive, favor selling |
| 80-100% | Very high | Very expensive |
Example: IV Impact
Same Stock, Different IV:
| IV Level | ATM Call Premium | 30% Stock Move |
|---|---|---|
| 20% (Low) | $2.50 | Good buy |
| 40% (Normal) | $4.00 | Fair |
| 60% (High) | $5.50 | Expensive |
| 80% (Very High) | $7.00 | Avoid buying |
High IV means you pay more for the same option.
Implied volatility is the market’s expectation of future price movement. High IV means options are expensive; low IV means they’re cheap. IV typically spikes before earnings and crashes afterward (IV crush). Check IV rank before trading to know if options are cheap or expensive.
IV Rank and Percentile
IV Rank
Where current IV is relative to its 52-week range.
- IV Rank 80 = Current IV is in the top 80% of the past year
IV Percentile
Percentage of days in the past year when IV was lower than today.
- IV Percentile 90 = IV was lower 90% of days last year
When IV Changes
IV Rises
- Before earnings/events
- Market uncertainty
- Fear and panic
- Unexpected news
IV Falls
- After events resolve (IV crush)
- Market calm
- Low VIX periods
- Grinding bull markets
Trading IV
Low IV Environment
- Favor buying options
- Long straddles/strangles
- Debit spreads
High IV Environment
- Favor selling options
- Short straddles/strangles
- Credit spreads
- Iron condors
Common Mistakes
-
Buying before earnings without understanding IV crush – IV drop negates stock move.
-
Ignoring IV rank – Raw IV number means little without context.
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Selling low IV – Doesn’t make sense to collect small premium for same risk.
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Assuming IV predicts direction – IV measures magnitude, not direction.
How JournalPlus Tracks IV
JournalPlus logs IV levels at entry for all options trades, showing IV rank and helping you identify when high IV hurt your returns through IV crush.
