What Is Implied Volatility in Options Trading?
Learn what implied volatility measures, how it affects option prices, and how to use IV rank, IV percentile, and expected move in your trading.
Implied volatility (IV) is the market’s expectation of future price movement, expressed as an annualized percentage.
Low IV = cheap options. The market expects tight movement:
High IV = expensive options. The market expects a wider range of outcomes:
The key insight: option prices imply the volatility (see why it’s called implied volatility?). When traders bid up options, it signals they expect larger moves ahead—IV is backed out from those prices using a model like Black-Scholes.
Consider ATM options on a $250 stock with 30 days to expiration (DTE):
| IV | Call Price | Put Price |
|---|---|---|
| 25% | $7.65 | $6.63 |
| 35% | $10.50 | $9.48 |
Why is IV useful? It standardizes option prices across stocks. A $5 option on a $30 stock vs. a $15 option on a $250 stock is hard to compare—IV makes it apples to apples.
Expected Move
The expected move translates IV into a dollar range the stock is likely to trade within over a specific period.
Formula: Stock Price × IV × √(DTE / 365)
For a $100 stock with 30% IV and 30 days to expiration:
$100 × 0.30 × √(30 / 365) = $8.60
The market expects the stock to trade between $91.40 and $108.60 over the next 30 days—with roughly 68% probability (one standard deviation).
Why the square root of time? Volatility doesn’t scale linearly with time. If a stock moves 1% per day on average, you’d think 100 days = 100% total movement. But some days it goes up, some days down—they partially cancel out. Over 100 days, the expected range is √100 = 10x bigger, not 100x bigger.
IV vs Historical Volatility (HV)
Historical volatility (HV) looks backward. It measures how much the stock actually moved over a past period—20 days, 30 days, or any window you choose.
Implied volatility (IV) looks forward. It measures how much the market expects the stock to move.
| Metric | Timeframe | Source | Certainty |
|---|---|---|---|
| Historical Volatility | Past | Asset prices | Known |
| Implied Volatility | Future | Option prices | Expectation |
HV and IV tend to move together. If a stock’s HV jumps from 20% to 40%, option sellers won’t keep selling at 20% IV—they’ll demand higher prices. The market equilibrates.
When IV exceeds HV, options are relatively expensive. When IV is below HV, options are relatively cheap. But that doesn’t guarantee profits—an HV of 40% with IV at 50% might look like easy money for sellers, but if realized volatility ends up at 60%, selling 50% IV was actually cheap.
IV Rank and IV Percentile
Raw IV numbers mean little without context. A 30% IV could be abnormally high for one stock and rock-bottom for another. IV Rank and IV Percentile tell you where current IV sits relative to history.
IV Rank
IV Rank compares current IV to its 52-week range.
Formula: (Current IV − 52-Week Low) / (52-Week High − 52-Week Low) × 100
If a stock’s IV ranged from 20% to 60% over the past year, and current IV is 30%:
(30 − 20) / (60 − 20) × 100 = 25%
Current IV is 25% of the way from its low to its high.
IV Percentile
IV Percentile measures how often IV was lower than the current level over the past year.
If IV Percentile is 80%, current IV is higher than 80% of all observations over the past year.
Which one to use? Both work. IV Percentile is often preferred because it spots abnormalities better. If IV was at 20% and then jumped to 30% and stayed there with stability, IV Rank would read 100%, while IV Percentile would fall over time as 30% becomes the new normal.
Trading Application
- High IV Rank/Percentile (70%+): Options are expensive relative to history. Premium selling is attractive—you collect more, but accept more risk if volatility heightens further.
- Low IV Rank/Percentile (30% or below): Options are cheap. Premium buying faces fewer headwinds, but you still need the stock to move enough to overcome theta.
Understanding IV Crush
An IV crush is a rapid drop in implied volatility after a known event—earnings reports, FDA announcements, or any anticipated news.
Before earnings, IV inflates—often to 80-150%+ in the weekly expiration including the earnings date, though the exact level depends on the stock and when earnings fall. Thursday earnings means 1 DTE to Friday expiration, so IV reads higher than Monday earnings with 4 DTE. After the announcement, uncertainty resolves and IV collapses back to normal levels for that stock, or revises to a new normal if the earnings report changed the outlook.
Example: A $100 stock reports earnings Wednesday after close. The Friday-expiring straddle (2 DTE) at 80% IV costs $4.72.
Thursday morning: the stock opens at $102. That’s an “inside move”—the straddle implied a larger expected move and the stock stayed within it. IV collapses to 30%. The call is now $2.09 and the put is $0.08.
The straddle buyer lost 54% overnight despite a $2 move. The IV crush destroyed more value than the directional move created.
Strategies Around IV Crush
- Selling into earnings: Collect inflated premium and profit if the stock stays within the expected move. Use defined-risk strategies (iron condors, iron butterflies)—never sell naked options through earnings.
- Buying into earnings: Buy straddles expecting an outsized move. High risk, but defined. You need the stock to move more than the expected move to profit.
- Avoiding earnings: Many traders close positions before announcements to sidestep the coin flip altogether.
Choosing Strategies for the IV Environment
The current IV environment can help with strategy selection:
| IV Environment | Favored Strategies | Avoid |
|---|---|---|
| High IV Percentile (70%+) | Iron condors, iron butterflies, covered calls, cash-secured puts, credit spreads | Naked long options, especially short-duration and/or deep OTM |
| Low IV Percentile (30% or below) | Long calls/puts, long straddles, calendars | Naked short options |
- Implied volatility is the market’s volatility forecast. It’s derived from option prices and reflects expected movement, not direction.
- Higher IV = higher option premiums. You pay more when the market expects large moves.
- Expected move = Stock × IV × √(DTE/365). This translates IV into a dollar range.
- Compare IV to history. Use IV Rank or IV Percentile to determine if current IV is high or low for that stock.
- IV crush destroys premium. Avoid holding long options through known events unless you expect an outsized move.
- Match strategy to IV environment. Favor selling premium when IV is elevated; buying premium when IV is depressed.
- Implied volatility is the market’s volatility forecast. It’s derived from option prices and reflects expected movement, not direction.
- Higher IV = higher option premiums. You pay more when the market expects large moves.
- Expected move = Stock × IV × √(DTE/365). This translates IV into a dollar range.
- Compare IV to history. Use IV Rank or IV Percentile to determine if current IV is high or low for that stock.
- IV crush destroys premium. Avoid holding long options through known events unless you expect an outsized move.
- Match strategy to IV environment. Favor selling premium when IV is elevated; buying premium when IV is depressed.
Next: What Is Vega? — Learn how vega measures your exposure to IV changes.
Related Guides
- Options Pricing Calculator — See how IV affects prices in real-time
- What Is Vega? — IV sensitivity explained
- Implied Volatility Calculator — Calculate IV from option prices
- What Is Theta? — Time decay explained
