Implied volatility
Also known as: IV
Implied volatility is the level of future that the market is pricing into an option's premium, backed out from the option's actual trading price using an pricing model. Rather than measuring how much a has moved in the past, it captures how much the market expects the to move going forward, over the remaining life of the option.
Implied volatility rises when demand for increases relative to supply, often because investors expect a bigger move in the , around an or some other known event, or because fear and uncertainty about the or the broader market have picked up. It falls when that expected uncertainty fades. Because are directly tied to it, a with high implied volatility will have noticeably more expensive than a similarly priced with low implied volatility, all else being equal.
Investors use implied volatility to judge whether look cheap or expensive relative to how much the underlying has been moving, comparing it to the 's realized, or historical, . sellers generally want to sell when implied volatility looks high relative to what they expect the to do, since they are being paid a bigger premium for taking on the risk, while buyers generally prefer to buy when implied volatility looks low, since they are paying less for the same expected move. The , which tracks implied volatility on the , is the most widely followed gauge of this kind for the broad .