Implied Volatility

Implied volatility is the expected future volatility of the stock. Implied volatility shows the stock’s potential movement, but it doesn’t forecast the direction of the move. If the implied volatility is high then it means that the market has priced in the potential for large price movements in either direction for the stock. If the implied volatility is low, the price won’t move as much or may not make any unpredictable changes.

Implied volatility is one of the important deciding factors in the pricing of options. As implied volatility increases, the value of options will increase. That is because an increase in implied volatility suggests an increased range of the potential movement for the stock.

The Implied volatility is derived from the Black-Scholes formula, by entering all the parameters needed to solve for the options price through Black Scholes Model and then taking the actual market price of the option, and solving back for the implied volatility parameter.