Implied Volatility — the Price of Possibility

What IV is

Implied volatility is the market's forecast of future movement, BACKED OUT of option prices: expensive options = high IV. IV is quoted as an annualized % (IV 40 ≈ market prices ±40% movement over a year). It is forward-looking — the one major option input that is a consensus guess rather than a fact.

IV rank & the seller/buyer decision

IV Rank compares current IV to its own 52-week range: IV rank 90 = options are expensive vs their own history (favor SELLING premium); IV rank 10 = options are cheap (favor BUYING). Buying options when IV is high means paying peak prices for possibility — and losing even when the stock moves your way if IV collapses (IV crush after earnings is the classic). The veteran's rule: buy low IV, sell high IV — direction is only half the trade.

The earnings crush

IV inflates before known events (earnings, FDA) then collapses instantly after — an option can be right on direction and still lose to the IV crush. Event trades must overcome BOTH theta AND the crush. This is why event-week premium selling is a strategy and event-week premium buying is usually a donation.

Sources

• Implied Volatility & IV Ranktastytrade
• Option Volatility & PricingSheldon Natenberg