What It Means
Implied Volatility (IV) is the market's forecast of how much an underlying asset is likely to swing, in either direction, before an option expires. It's expressed as an annualized percentage and is baked directly into the option's premium.
How It Works
Higher IV means the market expects bigger price swings, so option premiums get more expensive on both the call and put side, regardless of which direction price actually moves. IV tends to climb ahead of known events, like a Union Budget, an RBI policy day, or a company's earnings, and then drop sharply once the event passes, even if the underlying itself barely moved. That post-event drop is often called IV crush.
Example
A stock trading calmly at ₹1,000 might carry an IV of 20%. The week before its quarterly results, IV could jump to 40% purely on uncertainty, making both calls and puts noticeably pricier, even with the stock price unchanged.
Warning
High IV doesn't mean an option is a good buy. It means the option is priced for bigger expected moves, which also makes it more expensive to hold if that move doesn't show up, or shows up and then reverses fast (IV crush).
Related Terms
- Option Chain — where IV is displayed per strike, alongside OI and price