Implied Volatility: What the Market Thinks Will Happen
Dec 18, 2025When traders talk about options, they often throw around the term “IV” — Implied Volatility. But what does it really mean?
Implied volatility isn’t based on past stock movement — it’s based on future expectations. It tells you how much the market believes a stock might move in the near term. The higher the IV, the more expensive the option. The lower the IV, the cheaper it is.
Here’s why it matters:
- Buyers of options want IV to rise after they buy — that pushes the price of the option up.
- Sellers of options want IV to fall — so the option decays in value faster.
One common trap is something called IV crush. Imagine buying a call before earnings. The stock doesn’t move much — but your option drops in value. Why? Because implied volatility dropped sharply after the announcement. The market no longer expects big movement.
Smart traders use tools like IV Rank and IV Percentile to know if current IV is high or low compared to the past. This helps guide whether it’s a better time to be a buyer or seller of options.
Bottom line? Understanding IV is key to knowing whether you’re overpaying or underpricing an option — and helps you avoid costly surprises.