Implied Volatility (IV)

Implied volatility is the level of future movement an option's market price implies - the volatility input that makes a pricing model match what the option actually trades for, expressed as an annualized percentage. It is the market's priced-in expectation of movement, not a forecast that must come true.

IV is derived, not observed: take the traded option price, hold every other input fixed, and solve for the volatility that reproduces it. When traders bid up options - for protection or for exposure - IV rises; when demand fades, it falls. IV is therefore best understood as the price of optionality.

IV is not one number. It varies across strikes (the skew) and across expirations (the term structure), forming a surface. Downside index puts usually carry higher IV than upside calls, and event days carry elevated IV that deflates once the event passes - the mechanics behind IV crush.

Comparing implied to realized volatility is one of the most useful structural reads: when IV sits far above realized, options are expensive relative to how the market actually moves (a fat volatility risk premium); when realized runs above implied, the market is moving more than options priced - the signature of stress regimes.