Implied Volatility — Concept Explainer Video

Transcript

What is priced into the option?

Implied volatility is the volatility input that makes a pricing model match an option market price. Think of it as a measure of uncertainty reflected in the quote. It describes the size of possible moves, not a bullish or bearish direction.

Different from realized volatility

Historical volatility measures movements that already happened. Implied volatility comes from current option prices and a model. Neither tells you exactly what happens next. Different strikes and expirations can imply different volatility levels for the same underlying.

A volatility change affects value

Imagine a call with vega of twelve cents per volatility percentage point. If implied volatility rises from twenty to twenty three percent, the estimated gain from that change is thirty six cents per share, holding the other inputs fixed.

A correct direction can still lose

An option bought before an uncertain event can fall after the event if implied volatility drops. That decline can offset a favorable stock move. This is often called volatility crush. Time passing can reduce value at the same time.

Compare like with like

Compare volatility across matching expirations and sensible strike ranges, and check the model assumptions. High implied volatility is not automatically overpriced. The useful question is how much uncertainty the premium reflects, and how your position responds if that changes.