What is Implied Volatility in Options?

Implied volatility (IV) represents the market’s expectation of how much the underlying asset may fluctuate over a period. Its effect is reflected in the current option price. 

As per general market understanding,

• A higher IV indicates the market is pricing in larger potential price movements in the underlying asset.
• A lower IV indicates smaller expected price movements.

For example, suppose a Nifty option’s IV rises. Now, its premium may increase because the market is pricing in greater expected volatility. 

While learning how to use implied volatility in trading, traders may realise that IV is different from “historical volatility”, which measures how much the underlying asset actually moved in the past. In contrast, IV reflects the market’s expectations of future price fluctuations as implied by current option prices. 

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