Markets · 6 pages · 12 min

Why implied volatility is a price not a fact

Implied volatility is the swing input that matches an option's market premium, not a measured future move.

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From the opening

Implied volatility is the volatility input that, placed in a pricing model, reproduces the option premium the market is charging. It quotes that premium in the language of swing, and it is not a measurement of how much the shares will in fact move. The opening covers the number is solved from a premium, a model supplies the translation, and strikes can disagree at once.

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Inside

The number is solved from a premium
A model supplies the translation
Strikes can disagree at once
Realized vol looks backward
Where the idea stops applying
A distinction worth keeping

Sources

Black-Scholes implied volatility
Implied versus realized volatility

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Why implied volatility is a price not a fact

From the opening

Inside

Sources

Also on the desk