Glossary term
Implied Volatility
The market's forward-looking volatility forecast, extracted from option prices. Not historical — expectational. High IV means rich option premium; low IV means cheap premium. Closelook's Derivatives portfolio sells premium when IV Rank is in the upper quartile and steps aside when it collapses.
Definition & Context
Implied Volatility (IV) is the volatility assumption that makes Black-Scholes (or a similar pricing model) return the option’s market price. It is expectational: it says nothing about the past, only about what buyers and sellers of that specific strike think future volatility will be. IV is stated in annualised percent — IV = 25 means the market expects roughly 25% annualised volatility over the option’s remaining life. Each strike has its own IV (the volatility smile or skew); the VIX is a weighted composite of near-term S&P 500 IVs.
Practitioners track IV Rank (current IV as a percentile of the last year) and IV Percentile. Selling premium is attractive when IV Rank is elevated (typically > 50) because the premium embeds a volatility cushion; buying options is attractive when IV Rank is compressed. IV reliably mean-reverts, but mean reversion can take weeks and comes with convex downside if selling naked — see the 2018 Volmageddon blow-up of XIV.
Why It Matters for Investors
IV is the single most important variable for anyone writing options. Closelook’s Derivatives model portfolio uses IV Rank as its primary entry filter: covered calls and cash-secured puts are opened only when IV Rank is above 50 on the underlying. When IV Rank collapses below 20, the portfolio parks in cash — premium is too thin to justify assignment risk. This IV-aware gating is what separates a repeatable premium-harvest strategy from naive option-selling.
Related Concepts
IV underlies the VIX, drives attractive entry conditions for Covered Calls and Cash-Secured Puts, and feeds the Volatility dimension of the Weekly Signal.