Implied volatility (IV) is the market's expectation of how much the underlying stock or index will move, extracted from the price of its options. It isn't measured from past prices. It's the volatility number implied by what buyers and sellers are currently paying in premium.
Where does IV come from?
An option's fair price depends on a handful of inputs: the underlying's price, the strike, time to expiry, interest rates, and expected volatility. All of those except volatility are known facts. So pricing models run the logic in reverse: take the premium actually trading in the market, and solve for the volatility that would justify it. That solved-for number is the IV.
In plain terms, IV is the answer to: "How big a move is the market charging for?" When option writers fear large swings, they demand fatter premiums, and IV reads high. When the market expects a quiet drift, premiums are thin and IV reads low. IV is quoted as an annualised percentage. A higher number means bigger expected swings, in either direction. IV says nothing about which way.
IV lives inside the time-value part of the premium; if that split is unfamiliar, read What makes up an option's premium? first.
How is IV different from historical volatility?
| Historical volatility | Implied volatility | |
|---|---|---|
| Looks | Backward, how much price actually moved | Forward — how much movement the market expects |
| Computed from | Past price data | Current option premiums |
| Changes when | Past window shifts | Sentiment, demand and events shift |
The two often diverge, and the gap is informative. Before a company's results announcement, the stock may have been sleepy for weeks (low historical volatility) while its options turn expensive (high IV). The market is pricing in a jolt it hasn't seen yet. After the announcement, IV typically collapses because the uncertainty has resolved.
Why should an option buyer care about IV?
Because IV can make or lose you money independently of the stock's direction.
Suppose Farhan buys a call on Sundar Textiles the day before results, paying a rich premium because IV is elevated. Results come out mildly positive and the stock inches up. Yet his call falls in value. The post-event IV collapse (traders call it "IV crush") deflated the premium faster than the small price move inflated it. Farhan was right on direction and still lost money.
The reverse also holds: buying options when IV is unusually low means paying less for the same possibility, and a subsequent IV rise can lift the premium even in a flat market. Option sellers face the mirror image of all of this. None of this makes IV a timing tool. It makes it a price tag you should read before paying.
Two practical pointers: IV is one of the option Greeks family. The sensitivity called vega measures how much a premium moves per point of IV change, and you can see it per contract as shown in How to check Options Greeks on Rupeezy? And if the IV you see on Rupeezy differs slightly from NSE's published figure, that's a calculation-input difference, explained in Why is there a difference between NSE's IV and Rupeezy's IV?
Things to keep in mind
- IV is an expectation embedded in premiums, not a forecast that comes true. The market's "priced-in" move is frequently wrong in both directions.
- Compare an option's IV with the same instrument's own recent IV range before buying; a great directional idea can still lose to an IV crush.
- High IV means expensive options, not a signal to sell them. Selling into high IV carries the unlimited-loss profile described in What are the risks of trading Futures and Options (F&O)?
- Different platforms can show slightly different IVs for the same contract because of model inputs; the level matters less than the change.
Read next
How do I read an option chain? — All of it comes together on a single screen.