Implied Volatility

The market's forward-looking estimate of how much a stock will move, expressed as an annualized percentage — higher IV means more expensive options and larger expected moves.

Implied volatility (IV) is derived by working backwards from an option's market price using an options pricing model. Rather than predicting the future, it captures what the market is currently pricing in as the expected range of movement. A stock with 30% IV is expected by the options market to move roughly 30% over the next year — about ±8.7% per month or ±1.9% per week.

IV is the primary driver of option premiums beyond intrinsic value. When IV is high — around earnings, major economic events, or during broad market uncertainty — options are expensive. When IV is low — during calm, trending markets — options are cheap. The VIX index is the implied volatility of the S&P 500 and is often called the "fear gauge" for this reason.

"IV crush" is the sharp drop in implied volatility that occurs after a binary event (typically earnings) passes. Options inflate in price before the event to reflect uncertainty; once the event resolves, IV collapses even if the stock moves significantly in the expected direction. Retail traders who buy calls before earnings and correctly predict the direction often find the option is worth less the next morning anyway — the move was already priced into the IV, and its collapse erased the gains from the directional bet.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.