Implied Volatility
Implied volatility (IV) is the market's forecast of how much an asset's price will move over a specific period. It's derived from option prices and expressed as an annualized percentage. Higher IV means options are more expensive.
Understanding the Concept
• IV rises before uncertain events (earnings, FDA decisions, elections) • IV crush occurs when uncertainty resolves and volatility drops sharply • High IV benefits option sellers; low IV benefits option buyers • IV rank compares current IV to historical levels (useful for context)
Real-World Example
Tesla's implied volatility is 60% before earnings, meaning the market expects roughly a 3.8% daily move (60% ÷ √252). After earnings, IV drops to 35% even though the stock only moved 2%. This "volatility crush" causes options to lose value rapidly, hurting buyers who paid inflated premiums.
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