What implied volatility actually is
Implied volatility is not a forecast. It is the number that, put into an option pricing model, reproduces the price the market is currently charging.
Read that way, it is a measure of what protection costs today relative to what it has cost historically — nothing more.
Using it without over-reading it
When implied volatility sits well above its own history, selling premium is relatively better compensated. When it sits below, buying protection is relatively cheap.
Neither observation tells you where the price is going, and treating it as if it does is one of the more common ways retail option strategies go wrong.
This article is provided for informational and educational purposes only and should not be considered personalised financial advice. Please review our full Risk Disclosure before acting on any information contained here.
All insights