Implied Volatility – IV is a very important metric of an option price.
IV is calculated by taking an option price, inputting it into the Black Scholes mathematical formula to solve for the value of the volatility.
IV is determined by the current option prices to calculate expected future volatility or range of the stock price.
IV is the expected or implied volatility of an annualized stock move of one standard deviation.
Example
A stock trading at $100 per share with an IV of 23% implies the stocks volatility range (or one standard deviation) is $23 for the next 12 months. That is 23 points up or 23 points down from its current price.
Implied volatility is always changing and is influenced by many factors.
When a stock has a low IV, it implies that the stocks future volatility is expected to be low, but that is a result of the option prices are priced low.
The opposite is also true, when a stock has an IV that is in the higher range, it reflects higher volatility is expected and that is because the option prices are higher or on the expensive side.
- Low IV = cheaper option prices
- High IV = expensive option prices
