IMPLIED VOLATILITY BASICS
Plain English
Implied Volatility (IV) is the market's best guess at how much a stock will move. High IV = expensive options (market expects big moves). Low IV = cheap options (market expects calm). IV is the single biggest factor in whether options are 'cheap' or 'expensive.'
Going deeper
Implied Volatility is the market's forecast of the likely magnitude of a stock's price movement. It's derived from current option prices using pricing models. IV is expressed as an annualized percentage. A stock with 30% IV is expected to move within a 30% range over the next year (approximately 1 standard deviation). IV tends to increase before earnings, FDA decisions, and other binary events, then 'crush' afterwards. IV Rank and IV Percentile help compare current IV to its historical range. Selling options when IV is high and buying when IV is low is a core edge.
Examples
IV Crush After Earnings
Before earnings, IV on a stock jumps to 80%. An ATM straddle costs $10. After earnings, IV drops to 30%. Even if the stock moves $3, the straddle might only be worth $4 because all that volatility premium evaporated.
IV Rank
A stock's IV is currently 40%. Its 52-week range is 20% to 60%. IV Rank = (40-20)/(60-20) = 50%. This tells you IV is in the middle of its range — not particularly cheap or expensive.