Options trading
Implied volatility (IV)
Definition
Implied volatility is the size of future moves that the market is pricing into an option. Higher IV makes options more expensive, and IV often drops after earnings, an effect called IV crush. See implied volatility.
Example
Say a $100 stock has options priced at an implied volatility of 32%. A common shortcut divides by 16 to get a daily figure, so the market is pricing typical moves of about 2% a day, or $2. If IV jumps to 48% before earnings, the same options get more expensive, because the market is now pricing daily moves near 3%.
Hypothetical numbers, for illustration only.
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