Calculation and mechanics
Option pricing models such as Black-Scholes compute an option price from the underlying price, strike, time to expiry, interest rate and volatility. Implied volatility reverses that calculation: the market price of the option is given and the volatility that produces this price is solved for. It is therefore not a measurement of past price movement but the price buyers and sellers pay today for future movement.
IV differs by strike and expiry. Data providers therefore condense the option chain into one figure, usually the at-the-money interpolated IV with 30 days to expiry. A value of 20% means the market prices in a one-year standard deviation of 20% of the price, which corresponds to roughly 5.7% over 30 days.
IV 30 days = IV annual x sqrt(30/365)
Distinction
Historical Volatility measures how much the price actually moved over a past window. Implied volatility is an expectation, historical volatility an observation. The ratio of the two is the IV/HV Ratio.
Whether an IV of 25% is high or low for a given underlying is not visible from the number alone. IV Rank and IV Percentile place the current value within its own 52-week range.
Related terms
- Historical Volatility (Realised Volatility, HV)
- IV/HV Ratio (IV/HV, IV-HV ratio)
- IV Rank (IVR)
- IV Percentile (IVP)
- Expected Move (EM, one standard deviation move)
- VIX (CBOE Volatility Index)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.