What implied volatility actually is

Implied volatility is the volatility figure that makes a pricing model return the price an option is already trading at. It is not a prediction and not a measurement. It is the market price of the contract, restated as an annualized standard deviation, because that unit lets you compare a $74 stock against a $600 one.

Start with what it is not, because that is where the money gets lost.

IV is not a forecast. Nobody at any exchange sat down and estimated that Nike will move 37 percent over the next year. What happened is that buyers and sellers traded a contract to $3.54, somebody ran Black-Scholes backwards, and 37 percent is the volatility input that produces $3.54. Change the price to $3.80 and the IV changes. The number is downstream of the trade, not upstream of it.

The example this whole series runs on

Nike, June 3. Stock at $74.20. Earnings June 26, after the close.

The July 18 expiry is 45 days out. The $74 put is trading at $3.54, and solving that price backwards gives an implied volatility of 37 percent. That is the raw fact. Everything below is translation.

Translation one: what it means per day

Divide the annual number by the square root of the number of trading days in a year, which is 252, so 15.87.

37 / 15.87 = 2.33 percent a day. On a $74.20 stock that is $1.73.

That sentence is worth more than the 37. "Nike moves about a dollar seventy a day, in either direction, on a typical day" is a thing you can hold in your head while you look at a strike three dollars away and ask whether that is really far.

Translation two: what it means by expiry

Multiply the spot by the IV by the square root of the time remaining in years. For July 18, that is 45/365, so 0.351.

74.20 x 0.37 x 0.351 = $9.64.

So the market is pricing a range of $64.56 to $83.84 by July 18, and expecting the stock to finish inside it about two times in three. One standard deviation, roughly 68 percent, assuming a normal distribution that stock returns do not actually follow.

Now go look at your strike. If you were about to sell the $70 put and thought you had picked something conservative, the market says $70 is well inside the one-sigma range and is charging you accordingly.

Why anyone bothers with the annualized form

Because dollars do not compare. A $2 expected move means something completely different on Nike than on a $9 stock, and comparing option premiums across two tickers in dollars tells you nothing at all.

IV normalizes. Nike at 37 and a utility at 18 is a statement you can act on. Nike's $3.54 put against the utility's $0.90 put is not.

The four conventions that make two screens disagree

You will look at the same contract on two platforms and get two IVs. All four causes are boring and all four are worth knowing.

Which price got solved. Bid, ask, mid or last trade. On a contract quoting $3.30 bid at $3.80 ask, those four answers span several volatility points. Solve the mid, always, and if the mid feels like a guess then the contract is telling you something.
Trading days or calendar days. 252 versus 365 changes the daily-move translation by about 22 percent. Neither is wrong. Mixing them inside one comparison is.
Which strike. There is no single IV for a stock. Every strike carries its own, and on Nike that July 18 chain runs from 44.5 percent at the $65 put down to 33.2 percent at the $84 call. That spread has a name and a reason.
Which model. Black-Scholes assumes European exercise and no dividends. American equity options are neither. Different platforms patch this differently, and the patch shows up in the third digit.

Compare IVs within one platform. Never across two.

What high IV is actually telling a seller

That the market expects a big move, and that you are being paid more to be wrong about it.

Both halves are load-bearing. High premium is not a gift, it is a quote for insurance on something the market has decided is risky, and the market is frequently right about that. The useful question is never "is this IV high" but "is this IV high relative to what this stock normally does, and is the reason it is elevated something I am comfortable underwriting". The first half of that question has two standard answers and they disagree. The second half has no formula at all.

OptionsKing scores every candidate strike on a deterministic 0 to 100 scale, blends that score with the return on the capital the trade ties up, and shows you the highest-ranked handful. There is no minimum score. How it works covers what the ranking does and does not tell you.

Questions people actually ask

What does 37 percent implied volatility mean?

That the option is priced as though the stock has a 37 percent annualized standard deviation of returns. Practically, about a 2.33 percent move on a typical day, and a one standard deviation range of plus or minus $9.64 over 45 days on a $74.20 stock.

Is implied volatility a prediction of where the stock is going?

No, in two ways. It carries no direction at all, and it is not a forecast of size either. It is the price of the contract restated in volatility units, so it tells you what the market is charging, not what the market knows.

Why is implied volatility different at every strike?

Because the market does not believe the lognormal distribution the model assumes. Downside strikes price in crash risk and steady demand for protection, so they carry higher volatility than upside strikes on the same stock and the same expiry.

Should I use 252 or 365 days to annualize?

Use 252 trading days for converting an annual IV into a per-day move, and calendar days over 365 for the time input in a pricing model. The two conventions answer different questions, and the only real error is mixing them inside one comparison.

Sources

Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.

Keep reading

Do the math on your own trade

Every price in this article is an illustrative worked example, not a quote. Read Volatility for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.