Options & Derivatives

Implied Volatility

Also known as: IV

The volatility input that makes a pricing model reproduce an option's market price.

Backed out of the market price by root finding, usually Newton-Raphson using vega as the derivative.

Why traders quote in vol. Option prices move mechanically as the underlying moves; volatility is far more stable, so a vol quote isolates what is actually being traded and stays comparable across strikes and expiries.

Implied usually exceeds subsequently realised volatility - the variance risk premium, compensation for bearing volatility risk. That gap is why systematic option selling has historically paid, right up until it catastrophically has not.

Full guide

Implied Volatility Explained

The market's forecast of future movement, backed out of option prices. Why traders quote vol instead of price.

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