Implied Volatility (IV)

Implied volatility is the single most important concept in options pricing. While historical volatility measures how much a stock has actually moved in the past, implied volatility reflects how much the market expects the stock to move in the future. It is extracted from current option prices using pricing models like Black-Scholes — essentially working the formula backward to solve for the volatility assumption.

When IV is high, options are expensive because the market is pricing in larger expected moves. When IV is low, options are cheap because the market expects relative calm. This doesn't tell you which direction the stock will move — only how much movement is expected. A stock with 50% IV is expected to move roughly 50% annualized, regardless of whether that movement is up or down.

Understanding IV is critical because it directly affects whether you should be buying or selling options. Buying options when IV is elevated means you're paying a premium that may evaporate when volatility normalizes (IV crush). Selling options when IV is high lets you collect inflated premiums. Options Pilot's Value pillar analyzes IV relative to a stock's own history, its sector peers, and the broader market to determine whether options are cheap, fair, or expensive at any given moment.