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Implied Volatility

Fundamentals

The movement an option's price implies the market expects before expiry — a quoted price for uncertainty, not a forecast of direction.

Implied volatility is the amount of movement an option's price implies the market expects in the underlying pair before the contract expires. It is not measured from past prices, the way historical volatility is. It is extracted from the premium people are actually paying, using an agreed pricing model, and it is normally quoted as an annualised percentage. Two options on the same pair with different strikes or different expiries routinely carry different implied volatilities. It is best read as a price rather than a forecast. Implied volatility says how much movement is being paid for, which is why it tends to rise ahead of scheduled events and known sources of uncertainty and to fall once they have passed, whatever the outcome was. It says nothing about direction, and it is not the probability that any particular outcome will occur. Its level also depends on the model used to extract it and on the inputs fed into that model, so a number is comparable only against numbers computed the same way — which makes the conventions of the source publishing it part of the figure rather than a footnote.

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After Implied Volatility