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Implied Volatility (IV)

Implied volatility is the market's expectation of future price movement, expressed as an annualized percentage.

Definition

IV is the volatility number that makes the model price match the market price.

Key Points​

  • IV is forward-looking - what the market expects, not what happened
  • IV is not direction - it measures magnitude of expected moves, not up or down
  • Higher IV → higher option prices (all else equal)

What IV Actually Tells You​

IV translates directly to an expected price range. If BTC is at $100,000 with 50% IV, the market expects BTC to stay within ±$50,000 over a year (1 standard deviation = 68% probability).

For shorter timeframes, the expected move shrinks by √time - a 30-day move is much smaller than a 365-day move.

Expected Range (30d)
±$14k
±14.3% from current
68% confidence
$86k→$114k
$86k$114k$100k68%
Implied Volatility50%
10% (calm)100% (volatile)
Time Horizon30 days
1 day90 days
Expected move = Price × IV × √(days/365)
$100k × 50% × √(30/365) = ±$14k

IV is calculated per option - each strike and expiry has its own IV. They differ for three reasons:

1.

Volatility Smile/Skew

OTM puts often have higher IV than ATM options. Markets price in crash risk - a 20% drop is seen as more likely than a 20% rally, so downside protection costs more.

Downside protection priced higher50%55%60%65%70%-15%-10%-5%0%ATM+5%+10%+15%Implied VolatilityStrike (% from spot)
2.

Term Structure

Near-term options react more to immediate events (earnings, FOMC, protocol upgrades). Longer-dated options reflect baseline uncertainty.

Normal
50%60%70%7d14d30d60d90d
Pre-Event
50%60%70%7d14d30d60d90d

Pre-event: Near-term IV spikes before events, then collapses (vol crush).

3.

Supply and Demand

If everyone wants to buy a specific strike, its price (and IV) rises independently.

Together, these form the volatility surface — a 3D map of IV across all strikes and expirations. Each row is a skew curve for one expiry. Click an expiry label to highlight it:

Strike →← ExpiryIV ↑7d14d30d60d90d

↑ Select an expiry above to see its skew curve extracted from the surface

How It Works​

IV is "implied" because we work backwards:

  1. See the market price of an option
  2. Plug in spot, strike, time, and rates into Black-Scholes
  3. Solve for the volatility that produces that price

IV vs Historical Volatility​

Implied Volatility (IV)Historical Volatility (HV)
Forward-lookingBackward-looking
Derived from option pricesCalculated from past returns
What the market expectsWhat actually happened

When IV > HV: Market expects more volatility than recently observed When IV < HV: Market expects calmer conditions

Why IV Matters​

Options Get Expensive When IV Is High​

High IVLow IV
Market expects large movesMarket expects small moves
Options are expensiveOptions are cheap
Sellers get more premiumBuyers pay less

You Can Be Right and Still Lose​

If you buy a call expecting BTC to rise:

  • BTC rises 3%
  • But IV drops from 80% to 50% ("vol crush")
  • Your call loses value despite being right on direction

This is vega risk.

When IV Changes​

IV increases when:

  • Major events approach (FOMC, protocol upgrades)
  • Uncertainty rises
  • Large unexpected moves occur

IV decreases when:

  • Events pass ("vol crush")
  • Markets become range-bound
  • Uncertainty resolves

Typical IV Levels​

AssetTypical IV Range
BTC options40–100%+
ETH options50–120%+
SPX options10–30%

Crypto IV is higher because crypto is more volatile.

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