Options: volatility
An option's price doesn't depend only on direction: it depends above all on implied volatility. Here you learn to see whether an option is expensive or cheap before trading it — the difference between getting direction right and still losing.
By the TradingCalculator.Pro team · Updated on · About us
Start your 7-day free trial →What you will learn
Implied volatility (IV)
It is the market's expectation of how much the underlying will move, baked into the option's price. High IV = expensive premiums (the market expects movement); low IV = cheap premiums. It doesn't predict direction, only magnitude. It is what you truly buy or sell when you trade options.
IV Rank & percentile
Raw IV tells you nothing; you must compare it to its own history. IV Rank places current IV within its 52-week range (0-100). Desk rule: IVR > 50 favours selling premium (iron condors, strangles); IVR < 25 favours buying it (debit spreads). The percentile is the more robust variant.
Volatility skew
IV is not the same across strikes. In stocks and indices, OTM puts usually carry more IV than calls (put skew): the market pays more for downside protection than upside speculation — fear costs money. The shape of the curve (smile/smirk) tells you where the stress is and which legs sell rich.
Term structure
It is IV by expiration. Normally it is in contango: far-dated expirations have more IV than near ones (more time, more uncertainty). Before an event (earnings, rate decision) the short term spikes and the curve inverts (backwardation): a sign the market is pricing an imminent jump.
Vol crush at earnings
Before earnings, IV inflates because everyone expects a big move. The moment the news drops, uncertainty vanishes and IV collapses at once (vol crush). That is why buying options right before earnings usually loses even if you get the direction right: the move doesn't offset the premium drop. Premium sellers exploit exactly this.
Vega: implied vs historical
Vega measures how much the option changes per 1% of IV: it is your exposure to volatility. The operational key is to compare IV (expected) with HV or realized volatility (what actually happened): when IV ≫ HV, the option is expensive and selling has a statistical edge; when IV ≪ HV, buying does. That is where volatility desks find their edge.