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.
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