Implied Volatility

Implied Volatility

The implied volatility (IV) of an option contract is the volatility implied by the market price of the option based on an option pricing model, generally the Black-Scholes model. Implied volatility is a forward-looking measure and differs from historical volatility.

Option pricing models, such as Black-Scholes, use a variety of inputs to derive a theoretical value for an option one of which is implied volatility. Without going into the math behind option pricing models I just sum up a bit.

In the most basic sense, implied volatility is a measure of the underlying stock's likelyhood to have a large move before the options expiration. The higher the IV the more likely the market believes the underlying stock will move away from its current price.