Implied Volatility (IV)

Implied volatility (IV) is the volatility level that, when input into an option pricing model like Black-Scholes, produces a theoretical value equal to the option's current market price. It represents the market's consensus expectation of future price fluctuation over the option's remaining life. Unlike historical volatility (which measures past price movements), IV is forward-looking and reflects supply and demand dynamics in the options market. Higher IV means options are more expensive, indicating the market expects larger price swings. IV typically rises before uncertain events like earnings announcements, FDA decisions, or elections, and often "crushes" afterward. The VIX index is derived from SPX option implied volatilities and is known as the "fear gauge." IV is expressed as an annualized percentage and is the most important factor in option pricing after the underlying price.