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Trading and Investment Terms

Implied Volatility

Implied volatility (IV) is one of the most important concepts for options traders to understand for two reasons. 

  • First, it shows how volatile the market might be in the future. 
  • Second, implied volatility can help you calculate the probability

 

 

In simple terms, IV is determined by the current price of options contracts on a particular stock or future.

 It is represented as a percentage that indicates the annualized expected one standard deviation range for the stock based on the option prices. 

 

For example, an IV of 25% on a $200 stock would represent a one standard deviation range of $50 over the next year.

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