What Is Implied Volatility (IV)

    Implied Volatility (IV) is crucial in options trading, helping investors forecast future market trends and the pricing of options contracts. IV is derived from market prices of options, reflecting traders' expectations for future volatility. It differs from historical volatility, which is based on past stock price data. While historical volatility shows actual stock fluctuations over time, IV indicates market predictions of future volatility. Investors compare IV with historical volatility to determine if an option is priced reasonably. Factors like supply-demand dynamics and the time until option expiration significantly influence IV. Higher IV leads to increased option prices due to the higher perceived risk of significant price movements. For example, options for a stock like Apple might have higher IV and thus higher prices than those for Walmart, reflecting expectations of greater volatility possibly due to technological innovations or market competition.

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