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Implied Volatility
The market's expectation of future price volatility, derived from current option prices.
Implied volatility is a measure of expected future price volatility, derived mathematically from the current market prices of an asset's options, reflecting the market's collective expectation rather than volatility that has already occurred.
Higher implied volatility generally makes options more expensive, since a wider range of future price outcomes increases the value of the right (but not obligation) an option provides.
Examples
- Rising implied volatility generally makes both call and put options more expensive.
- Implied volatility reflects expected future volatility, not volatility that has already happened.