What is Implied Volatility?

Implied Volatility (IV) is the market's forecast of the likely movement in a security's price. It is a critical component of an option's price, reflecting the perceived risk and uncertainty. High IV means the market expects large price swings, making options more expensive; low IV suggests the opposite.

How to Interpret the Charts

• IV Smile: This chart plots IV against various strike prices for a single expiration date. The typical "smile" or "smirk" shape reveals that out-of-the-money (OTM) and in-the-money (ITM) options often have higher IV than at-the-money (ATM) options. This is due to higher demand for options that protect against large, unexpected price moves.
• ATM IV Term Structure: This chart shows the IV of at-the-money options across different expiration dates. A normal, upward-sloping curve (Contango) indicates that long-term uncertainty is higher than short-term. A downward-sloping curve (Backwardation) is less common and can signal significant near-term risk or an anticipated event, such as earnings.

Practical Applications

• Assess whether options are relatively "cheap" (low IV) or "expensive" (high IV).
• Gauge market sentiment, as high IV often correlates with fear, while low IV can signal complacency.
• Structure trades that profit from expected changes in volatility, such as selling premium when IV is high and expected to fall (e.g., after an earnings announcement).