Implied Volatility
Implied volatility (IV) is the amount of future price movement that the market is pricing into an option. It is worked backwards from the option's price: the more expensive the option, the larger the swings traders expect.
Where the number comes from
Option prices depend on the asset price, strike, time to expiry, interest rates and one unknown: how much the asset will move. Pricing models such as Black-Scholes take an option's market price and solve for the volatility that would justify it. That solved value is the implied volatility, usually quoted as an annualized percentage.
IV is not a forecast of direction. It describes the expected size of moves, up or down. It differs from historical or realized volatility, which measures how much the price actually moved in the past.
Reading an IV figure
A rough rule of thumb: an annualized IV divided by about 19, the square root of the number of trading days in a year, gives the expected typical daily move. Crypto trades every day, so the square root of 365, about 19.1, is used. Say BTC options show an IV of 57 percent. That implies typical daily moves of around 3 percent. It is a statistical expectation, and actual moves are often larger or smaller.
Why it matters
High IV makes options expensive for buyers and attractive for sellers; low IV does the reverse. IV often rises before scheduled events, such as major economic data releases, and during sell-offs, because traders bid up protection. After the event, IV frequently drops sharply, a move called an IV crush, which can make an option lose value even when the price moved in the buyer's favor.
Crypto indices such as Deribit's DVOL track 30-day implied volatility for BTC and ETH, similar to how the VIX tracks the S&P 500.
Common pitfalls
Buying options right before an expected event often means paying peak IV. Comparing IV across different expiries or strikes without understanding the volatility smile, the pattern in which IV varies by strike, can mislead. And low IV does not mean low risk: markets can turn calm right before a sharp move.
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Frequently asked questions
Does high implied volatility mean the price will fall?
No. It means traders expect large moves, which can be up or down. It reflects uncertainty, not direction.
What is an IV crush?
A sharp fall in implied volatility after an anticipated event. Options lose value quickly, even if the underlying price moved.
How is implied volatility different from historical volatility?
Historical volatility measures past price movement; implied volatility is the movement the market expects, as embedded in option prices.
Related terms
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