Implied volatility (IV)
The volatility number that, plugged into an option pricing model, reproduces the option’s market price. It is the market’s consensus forecast of future movement, expressed as an annualized standard deviation.
IV is a price, not a fact: it is what buyers and sellers currently agree uncertainty is worth. Dividing annualized IV by √252 gives the implied daily move — 16% IV corresponds to roughly 1% per day.
Comparing implied volatility to what subsequently happens (historical volatility) defines whether options were expensive or cheap in hindsight — the core of the volatility risk premium.
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