What is implied volatility?

The amount of future price movement an option's market price implies, quoted as an annualized percentage.

It is derived by working an option pricing model backwards from the traded premium, so it reflects what buyers and sellers are collectively willing to pay for movement rather than what has already happened. High implied volatility makes options expensive and often spikes before scheduled events and during selloffs.

It is not a directional signal. A high reading says the market expects a large move, not which way, and the same reading is consistent with a violent rally and a violent crash.

How it works

An option pricing model takes several inputs, including the strike, the time to expiry, the interest rate, and a volatility assumption, and returns a theoretical price. Every input except volatility is observable. So the market convention is to invert the model: take the price the option actually trades at and solve for the volatility number that would produce it.

The result is annualized by convention, which is what makes readings comparable across expiries. To convert an annual figure to the movement implied over a shorter window, divide by the square root of the number of such windows in a year. That square root scaling is why a 30-day option's implied move is much smaller than the headline percentage suggests.

Two further points are worth knowing. Implied volatility differs across strikes and expiries for the same asset, and plotting it produces the skew and the term structure that options traders watch. And it is a market price, not a forecast: it embeds a risk premium, which is why realized movement is frequently lower than what was implied.

Crypto options are concentrated on a small number of venues and are restricted or unavailable to retail buyers in many jurisdictions, so the readings you see quoted may come from a market you cannot access.

Example

Illustrative arithmetic. An asset shows 80 percent annualized implied volatility. To find the movement implied over 30 days, divide by the square root of the number of 30-day periods in a year, which is about 3.5. That gives roughly 23 percent.

So an 80 percent reading is the market pricing a one standard deviation move of about 23 percent over the next month, in either direction. At an illustrative price of $100, that is a range of roughly $77 to $123 covering about two thirds of the probability the market is pricing. It says nothing about which end is more likely.

Why it matters when you buy

For a spot buyer, this figure is background rather than a decision input, but it explains why costs move. Expected volatility widens spreads and thins depth, so the same order costs more to execute during a stressed period. The liquidity view shows measured spreads and depth by venue and asset, and spread and slippage explains how those translate into what you pay.

Related terms

• options contract: the instrument the figure is derived from
• volatility: the realized movement it is compared against
• strike price: one of the model inputs held fixed
• derivatives: the wider category of contracts
• spread: what widens when expected movement rises
• perpetuals: the more commonly traded crypto derivative

Questions

Is high implied volatility bearish?

No. It is a measure of expected size, not direction. Readings often rise into a fall because demand for protection rises, but they also rise ahead of anticipated upside events.

Why do options look expensive when nothing is happening?

Because the price reflects what the market expects rather than what has occurred, and it carries a premium for bearing that uncertainty. Realized movement is often lower than implied.

Can I trade crypto options where I live?

Often not. Crypto options are restricted or prohibited for retail customers in many jurisdictions, and the venues that offer them are a small subset of the market.