The level of future variability embedded in an option price under a pricing model.
How it works
Implied volatility is the volatility input that makes an option-pricing model match the observed option price. It reflects market pricing and model assumptions rather than a direct forecast.
Example
Implied volatility often rises before an uncertain event because option prices embed greater expected movement and demand for protection.
Limitations
Different strikes and maturities produce different values, creating a volatility surface. The measure depends on the model and does not predict direction.
Evidence LedgerHow this insight was built
Human reviewedThesis being tested
This definition explains Implied Volatility accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
What could invalidate the view
- A different market, instrument, jurisdiction, or methodology may use the term differently.
- The cited authority may revise its guidance or terminology.
- Editorial ownership
- Market Master · reviewed
- Approval state
- Reviewed financial content
- Evidence currency
- Current evidence window
- Source coverage
- 2 documented sources
Sources used for this insight