Implied Volatility Is a Price, Not a Prediction

Implied volatility is the most misread number on an option chain, and it is always misread the same way. People take it as a forecast.

It is not a forecast. It is an output: the volatility figure you have to feed a pricing model to make it agree with the price the market is already charging. IV does not tell you what will happen. It tells you what people are paying, in a unit that lets you compare one contract with another.

The model, run backwards

A pricing model takes five inputs and gives you a price. Four of them you can look up: the stock price, the strike, the time left and the interest rate. The fifth, volatility, you cannot.

So when a chain says 34% implied volatility, it means that at 34% annualised volatility the model produces the price the market is quoting. Change the market price and the implied volatility changes with it, because it comes from the price rather than the other way round.

That has a useful side effect. IV is a normalised way to compare premium. You cannot compare a $3.00 contract on a $50 stock with a $9.00 contract on a $400 stock. You can compare their implied volatilities.

What moves it

Demand for options. More than anything else. IV rises when people want contracts, usually for protection, and falls when they do not. It is a price, and prices move with demand.

Events with a date on them. Earnings, rulings, trial results. Uncertainty with a known date inflates IV until the date passes, then it collapses. That collapse is IV crush, and it has its own lesson.

Recent movement. A stock that has been jumping around tends to carry higher implied volatility, because people extrapolate. Sometimes they are right.

Market-wide fear. In a selloff, implied volatility rises across almost everything at once. That is why correlation risk matters: five separate short-premium positions all get marked against you on the same afternoon.

Why sellers care

As the vega lesson covers, selling premium is a short-volatility position by construction. Higher IV means more money for the same strike, the same expiration and the same obligation.

Implied against realised

Realised volatility is how much the stock actually moved, measured afterwards. Implied volatility is what the market charged in advance. They are rarely the same.

Across broad markets, implied has tended to run a little above the realised volatility that followed. That gap, the variance risk premium, is the edge premium sellers are harvesting, and it is real. It is also small, inconsistent, and quite capable of vanishing for months while you are short.

Put plainly: sellers are paid a modest, persistent premium for taking on volatility risk. It is an edge and not a guarantee, and it is smaller than most people selling premium think.

Is 34% high?

On its own, that question has no answer. Thirty-four percent is low for a biotech and alarming for a utility. The absolute number tells you nothing without context.

The context comes from comparing a stock's IV with its own history, which is what IV rank and IV percentile do, and where the next lesson starts.

What can go wrong

Treating IV as a prediction. It is a price, and prices are often wrong in both directions.

Selling the highest IV you can find. The names with the richest premium are the ones the market is most worried about, and it is often right.

Comparing raw IV across different stocks. Compare each name with its own history instead.

Missing an event inside your expiration. Elevated IV usually means an earnings date you did not check for.