Implied volatility (IV)

Implied volatility is the volatility figure that, when entered into an options pricing model, makes the model's theoretical price match the option's actual market price. Rather than being measured from historical price data, it is inferred, or implied, from what traders are currently paying, making it a forward-looking gauge of expected future price movement.

It is calculated by inverting a pricing model such as Black-Scholes model: given the option's market price, strike, and time to expiry, IV is the volatility input that solves the pricing equation, usually found numerically since there is no closed-form inverse. This differs from historical volatility, which looks backward at realized price changes rather than forward at market expectations.

Implied volatility rises when uncertainty or demand for options increases, and it varies by strike and expiry — a pattern known as the volatility skew or smile, which itself signals how the market prices tail risk asymmetrically. Traders use IV to compare whether options are expensive or cheap relative to their own history, and to derive the Option Greeks used for hedging. A common pitfall is treating IV as a prediction of direction: it says nothing about which way price will move, only how large a move the market is currently pricing in.