Implied Volatility
The volatility level implied by an option's market price — the market's forward forecast of realized volatility over the option's life.
Definition
Implied volatility (IV) is solved from the option-pricing model that takes spot, strike, time, and rates as inputs. The VIX is the most-quoted IV benchmark, calculated from a strip of SPX options at ~30 days to expiry.
IV typically trades above realized vol (the 'variance risk premium'), but can compress to or below realized during low-vol regimes.
Public research record
Research framework · page evidenceCompleted application: Implied Volatility
IV is the price of insurance. It governs option strategy P&L, position sizing for vol sellers, and the cost of hedges for long-only investors.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The volatility level implied by an option's market price — the market's forward forecast of realized volatility over the option's life. | Options |
| Release fact | March 2020: VIX peaked at 82, implying daily SPX moves of ~5%. Realized vol hit 80+ over the following month — IV was correctly priced, not excessive. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
IV is the price of insurance. It governs option strategy P&L, position sizing for vol sellers, and the cost of hedges for long-only investors.
Worked example
March 2020: VIX peaked at 82, implying daily SPX moves of ~5%. Realized vol hit 80+ over the following month — IV was correctly priced, not excessive.