What Is Implied Volatility? IV and IV Crush Explained
Implied volatility is the market's price for uncertainty, and the input that decides whether an option is expensive.
What is implied volatility?
Implied volatility is the annualised amount of price movement the options market currently expects, derived by solving an option pricing model backwards from the traded contract price. Implied volatility rises when traders bid up protection and falls when demand for that protection fades away.
Why does implied volatility rise before earnings?
A scheduled event guarantees a known moment of uncertainty, so option sellers demand additional premium to carry the risk across that moment. Implied volatility therefore climbs steadily into an earnings date regardless of which direction traders expect the underlying share price to travel.
What is implied volatility crush?
Implied volatility crush is the sharp drop in implied volatility immediately after a scheduled event resolves. The uncertainty that the premium was pricing has disappeared, so option values fall quickly even when the underlying share price moved in the option holder's chosen direction.
Frequently asked questions
Is high implied volatility good or bad?
High implied volatility favours option sellers and penalises buyers, while low implied volatility does the reverse. Neither condition is inherently good without a strategy attached.
Does implied volatility predict direction?
Implied volatility predicts the expected size of the coming movement and says nothing whatsoever about the direction of that movement. A high reading is equally consistent with a large rally or a large decline.