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Implied volatility
IV is the volatility input consistent with an option price under a model; it does not predict direction.
Lesson · Options Trading
Implied Volatility
Change implied volatility independently from stock price, observe theoretical premium expansion and contraction, and evaluate why a correct directional forecast can still lose money.
Synthetic educational examples
Core concepts
Implied volatility prices the size of movement, not its direction, and it moves on its own.
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Vega exposure
Long options generally gain theoretical value when IV rises and lose value when IV falls, all else equal.
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Event repricing
Anticipated events can raise IV before the event and produce rapid repricing after uncertainty is resolved.
Interactive lesson
Set a stock move and an IV change separately, then read which one explained the premium change.
Horizontal axis: implied volatility percentage. The expected-move estimate is one standard deviation under the model — stock × IV × √(days/365) — so roughly two outcomes in three finish inside it and one in three outside. It is not a price target and has no direction.
Evaluate IV exposure
Separate the directional thesis from the volatility price being paid.
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Read current IV
Compare contracts and expirations rather than treating IV as a standalone buy or sell signal.
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Identify known events
Earnings, decisions, and other scheduled events can affect the volatility term structure.
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Model IV expansion and contraction
Test whether the position remains acceptable under several IV outcomes.
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Plan the exit timing
Decide whether the trade depends on movement before, during, or after the event.
Implied-volatility effects
Score 0 / 0Choose the best answer.
Lesson rule
Change the inputs, calculate the result, and explain the risk before selecting a contract.
Common mistakes
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Treating high IV as a directional forecastIV describes expected variability, not whether price will rise or fall.
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Ignoring IV crushA favorable underlying move can be offset by a large reduction in IV.
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Comparing raw IV across unrelated underlyingsVolatility behavior differs by product, maturity, and event context.
Completion standard
✓
Finish when you can separate a premium change into the part the stock move explains and the part the volatility change explains, and say why a correct direction can still lose.
The drill uses the event preset’s own numbers; you should be able to reproduce the loss from the two contributions.
Model scope: Theoretical values use a simplified European Black–Scholes model with a fixed 4.5% annual rate and no dividend input, so a number here can be reproduced in any calculator that takes those inputs. Listed products, early exercise, dividends, spreads, fees, and market conditions can produce different prices and outcomes.