Implied Volatility
The volatility figure that, put into an option pricing model, reproduces the option's current market price.
Formula
Test: solve the pricing model for the volatility input that makes the model price equal the observed market price
Unit
%
In depth
Implied volatility is a price expressed in different units, not a forecast — it is what the market is charging for uncertainty, backed out of the premium. It is the only input to the Black-Scholes model that cannot be observed, which is why the model is used in reverse more often than forwards. Implied volatility rises before known events such as results and falls immediately after them, so an option can lose value on the day a correctly anticipated event occurs — the collapse in implied volatility outweighs the move. This effect catches out buyers who were right about direction and still lost money.
Worked example
A 24,000 call trades at 300 with 30 days left, implying about 14% annualised volatility. If implied volatility falls to 11% after an event while the index is unchanged, the same option is worth roughly 235 — a 22% loss with no move.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Implied Volatility” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.