Implied Volatility (IV)
Implied volatility is the market's expectation of how much a security's price will fluctuate in the future, derived from current option prices.
Instead of looking at past price swings, implied volatility works backward: it is the volatility figure that, plugged into an option pricing model, produces the option's current market price. It is quoted as an annualized percentage.
Higher IV means more expensive options and a market expecting bigger moves; lower IV means cheaper options and calmer expectations. IV tends to rise before known events such as earnings reports or FDA decisions, and often drops sharply after the event passes, which traders call IV crush.
A rough rule converts annual IV into an expected one-standard-deviation move: divide by the square root of the number of periods per year. Example: a stock at $100 with an IV of 32% implies about a 2% daily move (32% divided by roughly 16, the square root of 252 trading days), or about $2 per day.
IV does not indicate direction, only size. The VIX index applies the same concept to S&P 500 options and is known as the market's fear gauge.