Implied Volatility (IV)
Also called: implied volatility, IV, option IV, implied vol.
How it is read
Implied volatility is usually read as the price of uncertainty. It tends to rise ahead of a known, dated event. The range of possible outcomes widens then. It tends to fall once the outcome is known. That collapse is often called a volatility crush. It can leave a holder worse off. That can happen even after a move in the direction they expected. Compare implied volatility across the strikes of one expiry. That shows how the market is pricing different outcomes. Now compare it against realised movement. Realised movement is what the underlying actually did. That says whether options have been expensive or cheap next to it.
What it does not tell you
Implied volatility is an output of a pricing model. So it inherits every assumption of that model. It is only as good as the premium fed into it. On an illiquid strike it can be an artefact of a stale quote. A stale quote is one that nobody has refreshed. It carries no direction. A high reading says a large move is being priced. It does not say which way. It is not a forecast that anyone published. It is what the current price implies. That changes the moment the price does.
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Related concepts
Volatility Crush: The Event Happened and the Premium Still Fell
Before a known, dated event, option premiums carry extra time value, because nobody knows what the event will produce. Once it produces something, that uncertainty is gone. The premium loses the part of its value that was being paid for not knowing. This is called a volatility crush. It can leave a holder worse off even when the underlying moved the way they expected, because the move was smaller than the premium had already priced.
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