Implied volatility (IV) is the volatility figure that, when input into an options pricing model such as Black-Scholes, produces the current market price of an option. It reflects the market's consensus about future price fluctuations, rather than a forecast of actual moves.
Traders and researchers compare IV across strikes and maturities to assess relative pricing. Because option prices rise with higher IV, IV is often back-calculated from observed option prices for each option. IV is not a probability and does not guarantee future moves; it is a reflection of supply and demand for options, model assumptions, and expectations about future volatility.
IV can vary by strike (the volatility smile or skew) and by time to expiration, forming an IV surface. Changes in IV can be driven by upcoming events, market conditions, or shifts in demand for options. While higher IV implies a larger premium, it does not by itself predict the direction of price movements.
An at-the-money option on XYZ stock with 30 days to expiration has implied volatility of 22%, based on the current market price and an options-pricing model.
Option premium · Black-Scholes model · Implied volatility surface · Historical volatility · Volatility smile · Volatility skew