Implied Volatility (IV)
Implied volatility is the volatility level that an option pricing model backs out from the option's current market price.
✦ Key Insight
It is one of the most important drivers of option premiums and volatility trading.
✕ Common Misconceptions
IV is model-dependent and does not predict direction or guarantee realized volatility.
Detailed Explanation
In Practice
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Volatility
Volatility measures the magnitude and frequency of price changes in an asset or market over time.
Call Option
A call option gives its holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or at expiration, depending on the contract style.
Put Option
A put option gives its holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or at expiration, depending on contract style.
Option Premium
Option premium is the price paid by an option buyer and received by an option seller for the contract.
Vega
Vega estimates how much an option's price changes when implied volatility changes, all else equal.