Implied Volatility (IV)
Implied volatility — the volatility the market has priced into an option. High IV raises the premium; a fall in IV can lower the value of a long option.
Definition
Implied Volatility (IV) is the volatility “priced into” an option by the market — the higher the IV, the more expensive the premium, all else being equal. It is not a forecast of direction, only a valuation of expected volatility; a fall in IV (a volatility crush) can eat into a long option even when the direction is right.
Example
Before a company’s results, the IV of its calls and puts rises — premiums are expensive. After publication the share price moves, but IV falls: a long call can lose money despite the upward move if the drop in IV and theta outweighs delta.
Anti-example / common mistake
Buying options “because a move is coming” without checking whether IV already prices that move in. Another mistake: comparing premiums in PLN with no context of IV rank or IV relative to history.