Implied Volatility (IV)

The market's expectation of future price movement, reflected in options pricing.

What Is Implied Volatility?

Implied volatility (IV) represents the market's forecast of a likely movement in a security's price. It's derived from options prices — when options are expensive, IV is high (the market expects big price swings). When options are cheap, IV is low. Unlike historical volatility (which measures past movements), IV is forward-looking.

IV Crush: The Earnings Trap

One of the most important concepts for earnings traders is "IV crush". Before earnings, implied volatility spikes as the market prices in uncertainty. After the announcement — regardless of whether it's a beat or miss — IV collapses because the uncertainty is resolved. This crush can destroy the value of options even if the stock moves in the predicted direction.

Example: A stock's IV is 100% before earnings. You buy a call for $5.00. The stock beats and rises 3%. But IV drops from 100% to 40%. Your call might now be worth only $3.00 — you lost money despite being right about the direction.

Using IV for Earnings Predictions

• High IV (relative to history): The market expects a large move. If you think the move will be smaller than expected, you can sell options (collect premium).
• Low IV (relative to history): The market expects a small move. If you think a big surprise is coming, buying options can be highly profitable.
• IV percentile/rank: Compare current IV to the stock's historical range to assess if options are expensive or cheap.