Lesson 5 of 6 · Options 101
Implied volatility
Implied volatility is the price of uncertainty.
Implied volatility is the market's expectation of future price moves, backed out from option prices. An IV of 40% on a $100 stock implies about a one-standard-deviation move of $40, up or down, over a year. Higher IV means more expensive options, because bigger expected moves raise the chance of profit.
Is IV cheap or expensive right now?
The gauge shows IV rank from 0 to 100. The needle at 78 lands in the expensive zone above 70. At that level, options are priced for a larger move than usual. Buyers pay more; sellers collect more.
This one is an animated diagram in the app. See it in Vero.
IV crushes after the event.
IV rises before earnings and Fed announcements because the outcome is unknown. Once the event passes, uncertainty collapses. That collapse destroys extrinsic value fast. Buying a call the day before earnings means you paid peak IV, and the stock still needs to move enough to overcome that cost.
A stock's IV is 80%. A month ago it was 25%. Are options cheap or expensive right now?
Show the answer
C. Expensive, because IV is much higher than its recent history. IV directly drives option prices. At 80% versus a recent 25%, options are priced for a much larger move than usual. You pay more for the same strike and expiry.