As a new trader, you may have found yourself wondering, “What does implied volatility mean?” Implied volatility describes, in percentage terms, how much traders believe a security will move over the course of the next 12-months. For example, an implied volatility figure of 25% means that traders believe a security will move 25% from the current levels over the next year.
Implied volatility is different from actual volatility, which is also known as historical volatility. You can calculate implied volatility with an implied volatility calculator or a trading platform that provides you with this information. Implied volatility is important for many reasons, including describing the current market sentiment.
What is implied volatility?
Implied volatility describes how much traders believe a market will move on an annualized basis. It is a key variable that is used to price options on stocks, currencies, commodities, and alternative investment assets.
Since an option measures the likelihood that an asset will be “in the money” by the expiration date, traders need a variable that describes this probability. Implied volatility is a variable used in an options pricing model that helps option traders generate an option premium.