Implied Volatility
Canonical definition, formula, interpretation, and API reference.
Definition
Market's expected future volatility priced into options. Solved via Newton-Raphson from market prices.
Formula
IV = BSM_inverse(Market Price, S, K, T, r, q)
Find sigma such that BSM(sigma) = observed option price.
Inputs
market option pricespotstriketimerate
Output
implied_volatilityimplied_volatility_pct
Interpretation
- High IV: market expects large moves — options expensive
- Low IV: small expected moves — options cheap
- Annualized: 20% IV = ~1.26% daily expected move
API Reference
Endpoint
GET /v1/pricing/iv
Tier
Free
Response field
implied_volatility, implied_volatility_pct
Why Implied Volatility Matters for Trading
TL;DR
IV is what the market thinks volatility will be. Low IV = cheap options. High IV = expensive options. Its relationship to realised is everything.
- What it measures
- The volatility input that makes the Black-Scholes model price equal the observed option market price. Solved numerically.
- What it signals
- Market-expected future vol. A forecast, not a measurement.
- Why we measure it
- Every option strategy has an IV dependency. Knowing absolute and relative IV levels is what separates blindly buying vol from expressing a vol view.
- Who uses it
- All options traders — buyers, sellers, hedgers, structurers.
How to read Implied Volatility
IV low vs RV (cheap options)
- Long-vol setups attractive
- Straddles and calls priced below fair
- Favorable for directional buyers
- Catalyst plays profitable
Good for: long options, long straddles
IV high vs RV (expensive options)
- Options overpriced
- Premium selling edge
- Short strangles, iron condors
- Typical of positive gamma
Bad for: option buyers — good for: sellers
IV ≈ RV (fair)
- No structural vol edge
- Directional trades only
- Pure spot exposure
- Typical quiet regimes
Fair
Rules of thumb
- Annualised. 20% IV means 20% annualised — about 1.26% daily 1-sigma move.
- Compare to RV. IV alone tells you nothing. IV vs RV tells you if vol is cheap or rich.
- Event expansion is normal. IV routinely inflates 50–100% pre-earnings and collapses post-announcement. Back that out.
- Skew and term shape matter. A single ATM IV hides a world of skew and term-structure signals. See skew and term structure.
- IV rank is your friend. Percentile rank vs 52-week range (IV rank) normalises across names and time.
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