Implied Volatility

Implied volatility is the market's price of future movement, extracted from the option premium. Higher premium, all else equal, means higher implied volatility. It is not a forecast the model made. The model is inverted: traders set the price, and the volatility number is whatever the model needs to agree. A 30 percent implied volatility means the option is priced as if annualised movement of that order were fair, under the model's assumptions, which include no jumps and constant volatility, assumptions real markets break.

Implied volatility rises into events, because the premium must pay for a gap the calendar makes likely, and it often falls after the event prints. That crush is why a correct directional guess can still lose if you bought expensive premium. The volatility surface, different implied volatilities at different strikes and expiries, says the market does not believe one number. Skew, richer puts than calls in equities, is the usual shape. Read the strike you actually trade, not a single at-the-money figure, when you compare.

Compare implied with historical to see whether premium is rich or cheap versus recent movement, then check the event calendar before you sell that richness. Use a rising implied volatility as a cost warning if you buy options, and as a regime warning for the underlying: the option market is paying for a larger move. Do not treat a high number as a direction.

Selling options because implied volatility is "high" into earnings, and then being surprised by the gap the premium was paying for. Also comparing implied volatility across strikes as if they should match. The surface is not flat, and that is normal.

The number is model-dependent. Change the rates, the dividend, or the model and the implied volatility changes while the premium does not. And implied volatility is not the probability of finishing in the money. That is a different output, and mixing them up is a common way to misread an option chain.