Implied volatility
ConceptLevel: Intermediate
Implied volatility is the volatility that, put into an option pricing model, gives the market price of the option. It is quoted as a yearly percentage and says how much movement of the stock the premium pays for.
Key points
- Implied volatility is computed from the premium. It is a way of stating how expensive an option is, not a forecast of direction.
- A higher implied volatility means higher premiums for calls and for puts alike.
- An implied volatility of 30% on a $50 stock implies a move of about $4.30 up or down over 30 days as one standard deviation.
- Implied volatility often rises before an earnings announcement and falls once the announcement is out.
On this page
The price of a stock can be looked up. How much the stock will move cannot, and that is what an option's price depends on most. Implied volatility turns the question around: it takes the premium that the market pays and states how much movement that premium stands for.
What implied volatility is
A pricing model such as the Black-Scholes model computes a premium from the price of the stock, the strike price, the time left, the interest rate, the dividends and the volatility of the stock. All of them can be observed except one. The volatility until expiration is not known.
The market price of the option is known, however. Implied volatility is the volatility that makes the model give exactly that price. It is found by trying values until the model matches the market. It is called implied because it is read out of the premium.
Implied volatility is stated as a yearly percentage, whatever the life of the option.
How implied volatility differs from historical volatility
Historical volatility measures how much the stock did move over a past period. It is the yearly standard deviation of the daily price changes of the stock, and it is no forecast.
Implied volatility looks forward. It is the market's estimate of the volatility to come, read out of option prices, and it contains what buyers and sellers know is coming, such as an earnings date. It has no direct tie to the historical figure. An implied volatility well above the historical one says that options price in more movement than the stock has shown lately.
How implied volatility changes a premium
The table shows 30-day options with a strike price of $50 on a stock at $50, in the Black-Scholes model with an interest rate of 4% and no dividend.
| Implied volatility | 50 call | 50 put | One standard deviation over 30 days |
|---|---|---|---|
| 20% | $1.23 | $1.06 | $2.87, which is 5.7% |
| 30% | $1.80 | $1.63 | $4.30, which is 8.6% |
| 40% | $2.37 | $2.20 | $5.73, which is 11.5% |
| 60% | $3.50 | $3.34 | $8.60, which is 17.2% |
Calls and puts rise together, because volatility has no direction. The effect is largest for options at the money. Vega is its measure: the options of the table gain about $0.057 per share, $5.70 per contract, for each percentage point of implied volatility.
How to turn implied volatility into an expected move
An implied volatility is a yearly figure, even when it comes from an option with a few days left. The move it implies for a shorter period is found with the square root of time:
expected move = stock price × implied volatility × square root of (days ÷ 365)
This expected move is one standard deviation. In the model, the stock ends inside that range about two times in three and outside it about one time in three.
The formula above counts calendar days, as the pricing model of this page does. A common shortcut counts the 252 trading days of a year, whose square root is about 16: dividing an implied volatility by 16 gives the expected move of one day. An implied volatility of 32% stands for about 2% a day.
Why implied volatility rises before earnings and falls after
An earnings announcement is a known date on which the stock can move a lot. Options that expire after that date cost more because of it, and their implied volatility typically rises in the weeks before. Once the numbers are out, uncertainty gives way to more certainty, and implied volatility often drops sharply.
Why different strike prices have different implied volatilities
If the model were exact, every option on a stock would show the same implied volatility. They do not. On stocks, puts with strike prices below the market usually show a higher implied volatility than calls above it. The pattern is called volatility skew, and it reflects what buyers pay for protection against a sharp decline.
The implied volatility shown for a whole stock or an index is a summary of many options. The VIX is such a summary for the S&P 500 index over the next 30 days.
What can go wrong with implied volatility
Implied volatility is no forecast that comes true. It is a price. The stock can move far more than the premiums implied, which hurts the writers of options, or far less, which hurts the buyers.
A buyer who pays a high implied volatility needs a move larger than the one already priced. A writer who receives a high premium is paid for a risk that is high for a reason, and one standard deviation is exceeded about one time in three even when the model is right.
The number itself depends on the model and on its inputs. Close to expiration, and for options with wide spreads between the bid and the ask, an implied volatility computed from a quote can be far off.
Questions and answers
Is a high implied volatility good or bad?
Neither by itself. It means that options are expensive, which is a cost for a buyer and a larger premium for a writer. It also means that the market expects large moves, and a large move is what hurts a writer. The premium is higher because the risk is.
Terms used on this page
- Implied volatility
- The volatility that, put into a pricing model, gives the market price of an option. It is quoted as a yearly percentage and says how much movement the price of the option pays for.
- Historical volatility
- How much the price of the underlying did move over a past period, measured as the yearly standard deviation of its daily price changes. It is no forecast of the volatility to come.
- Vega
- The estimated change in the price of an option for a change of one percentage point in implied volatility.
- Expected move
- The range of one standard deviation that option prices imply for a period. It is about the stock price times the implied volatility times the square root of the number of days divided by 365.
- Volatility skew
- The pattern of different implied volatilities across the strike prices of one expiration. On stocks, puts below the market price usually carry a higher implied volatility than calls above it.
- Black-Scholes model
- The option pricing model published by Fischer Black and Myron Scholes in 1973. It gives a theoretical price from the stock price, the strike price, the time left, the interest rate and the volatility.
- VIX
- The Cboe Volatility Index, a measure of the volatility that the market expects over the next 30 days, computed from the prices of options on the S&P 500 index.
Sources
- Volatility & the Greeks, The Options Industry Council (read 29 September 2026).
- Vega, The Options Industry Council (read 29 September 2026).
- Options Pricing, The Options Industry Council (read 29 September 2026).
- Technical Information, The Options Industry Council (read 29 September 2026). Frequently asked questions.
- The Crush Is Real, The Options Industry Council (read 29 September 2026). Article of July 2026.
- May Key Takeaways: The Rule of 16 and the 0DTE Risk Profile, The Options Industry Council (read 29 September 2026). Article of June 2026.
- April Webinar Key Takeaways: Understanding Volatility and Options Skew, The Options Industry Council (read 29 September 2026). Article of April 2026.
- Cboe VIX FAQ, Cboe Global Markets (read 29 September 2026).
- Cboe Volatility Index Methodology, Cboe Global Markets (read 29 September 2026). Version 6.0 of February 2026.
- The Pricing of Options and Corporate Liabilities, Fischer Black and Myron Scholes, Journal of Political Economy 81 (3), 1973 (read 29 September 2026).