Implied Volatility — What Options Tell You About Expected Moves

Overview

Implied volatility (IV) is the market's forecast of future price movement, priced into options. High IV means big expected moves; low IV means calm. Trading IV is as important as trading direction. Keep an eye on upcoming earnings — IV typically spikes before reports and crashes after. Combine IV analysis with Bollinger Bands to visualise volatility on a price chart and refine your entry timing.

Key Takeaways

• IV is expressed as an annualised percentage. 30% IV ≈ ±30% expected move over 1 year.
• Daily expected move: stock price × IV × √(1/252). This gives you the 1-standard-deviation daily range.
• IV rank: where current IV sits relative to its 52-week range (0-100). Above 50 = elevated; below 30 = cheap.
• IV crush: IV collapses after known events (earnings, FOMC) — destroys option premium even if you're right on direction.

Practical Tips

• Buy options when IV is low (IV rank <30). Sell options when IV is high (IV rank >60).
• Check VIX for S&P 500 IV. Check individual stock IV on your broker's options platform.
• If you're buying options before earnings, you need the stock to move MORE than the implied move to profit.