What is implied volatility in options?

Implied volatility (IV) is the market's forecast of how much a stock is expected to move. High IV means the market expects big moves, making options expensive. Low IV means calm expectations and cheaper options. It does not predict direction, only the size of the expected move.

IV crush happens when implied volatility drops sharply, usually after earnings or a major news event. Options lose value even if the stock moves in your favor because the uncertainty premium disappears. This is the most common reason beginners lose money on earnings trades.

Implied Volatility Explained — Why Options Are Expensive Before Earnings

Last time: All four Greeks pulling at once — delta can win but theta + vega can still make you lose. Scenario three showed vega overwhelming a winning trade. Now let's understand the force behind vega.

You are planning an outdoor wedding. You check the weather forecast. It says 30% chance of rain. That does not mean it will rain 30% of the time. It means the weather model thinks there is a 30% chance rain shows up at all. If the forecast jumps to 80%, you start renting tents.

The forecast did not create the rain. It just told you how likely the weather people think it is.

Implied volatility is the stock market's weather forecast. It does not tell you which direction a stock will move. It tells you how big of a move the market expects. And if you buy options when the forecast says hurricane but only a drizzle shows up, you will overpay. Every time.

The House Deal
Premium: $2,000 · Strike: $100,000 · Expiration: 6 months
What if everyone in town suddenly wanted houses and bidding wars started? The price of your "right to buy" would spike — not because the house changed, but because expectations did. That is IV rising.

The Same Option at Two IV Levels

Our tracking trade. Apple $105 call, 45 days out.

At 25% IV: $3.00. This is the number we have been using.

At 45% IV: $5.20. Same stock, same strike, same expiration. $2.20 more expensive purely because the market expects a bigger move.

That $2.20 difference is entirely vega. Only the market's expectation of movement changed. And that expectation alone added $220 per contract.

In the premium lesson, we said there was one force we had not fully explained. This is it. Implied volatility is the biggest reason beginners overpay for options.

The Earnings Cycle

Before earnings, nobody knows the numbers. Uncertainty is high. IV climbs. Options get expensive.

After earnings, numbers are out. Uncertainty is gone. IV collapses. This is IV crush.

Scenario three from the last lesson. Apple went up $3 but the option lost money. IV dropped from 40% to 25% after earnings. Vega loss ($120) overwhelmed delta gain ($111).

I watched a client experience this firsthand. She bought puts before earnings because she was convinced the stock would drop. Stock dropped 4%. She lost money. IV went from 55% to 30% overnight. I showed her that the market had already expected a 6% move. Her 4% drop was smaller than expected. She paid for a hurricane forecast and got a drizzle.

IV Rank and IV Percentile

Is 35% IV high or low? Depends on the stock.

A utility stock that normally has 15% IV would be screaming at 35%. A biotech that normally sits at 60% IV would be unusually calm at 35%.

IV Rank tells you where current IV sits in the last year's range. If IV ranged from 20% to 50% and is currently 35%, IV Rank is 50% (halfway). Above 50% is generally high.

IV Percentile tells you what percentage of the last year had lower IV than today. At the 80th percentile, IV has been lower 80% of the time. Today is relatively expensive.

What This Means for Trades

Buying: You want IV low relative to history. Cheaper entry. If IV rises later, vega adds value.

Selling: You want IV high. Fatter premiums. If IV drops, the option you sold gets cheaper. Buy it back for less.

From lesson five: sellers love high IV. Buyers need to be careful. Same principle, now with the numbers to back it up.

SPY as Your Baseline

SPY options usually sit around 15-20% IV in normal markets. Above 30%, the market is worried. Below 12%, things are unusually calm. Use SPY IV as a quick temperature check.

The One Rule

Check IV before every trade. Not after. The information is on the screen. Use it.

Key Takeaways

IV = the market's forecast of expected movement. High IV = expensive options. Low IV = cheap options.
IV crush happens after earnings — options lose value even if the stock moves in your direction
IV Rank and IV Percentile give context — is this stock's IV high or low for this stock?
Buyers want low IV entry. Sellers want high IV entry. Check before every trade.

Pop Quiz — Let's see if this stuck.

The same option costs $3.00 at 25% IV and $5.20 at 45% IV. What caused the $2.20 difference?

Implied volatility. The market expects a bigger move at 45% IV, so the option is priced higher. Same stock, same strike, same expiration — the only difference is the market's expectation of future movement.

You buy calls before earnings. Stock goes up 3% but your option loses money. What happened?

IV crush. Before earnings, IV was high (pricing in a big expected move). After earnings, IV collapsed. The vega loss from the IV drop overwhelmed the delta gain from the stock's 3% move. The stock moved less than the market expected.

Bottom Line

Implied volatility is the market's forecast of expected movement. High IV means expensive options. Low IV means cheap options. IV crushes after earnings. Buyers should look for low IV entry points. Sellers should target high IV. Check it before every trade. It is the single most overlooked number in options trading.

Next up: Your First Trade →

Sixteen lessons of concepts. You understand what options are, how they are priced, and what forces move them. Time to do something with all of that. Next lesson, you are placing a trade.