Implied Volatility || Omnath Dubey

'Implied Volatility' is a term used in options trading to describe the market's expectation of how volatile the price of an underlying asset will be over the life of an option contract. It is a measure of uncertainty or risk associated with an underlying asset's future price movements, as implied by the options prices traded in the market.

Implied volatility is calculated using an option pricing model such as the Black-Scholes model, which takes into account factors such as the current market price of the underlying asset, the exercise price of the option, the time remaining until expiration, and prevailing interest rates.

A high implied volatility indicates that the market expects the underlying asset to be highly volatile, with large price swings, while a low implied volatility indicates that the market expects the underlying asset to be less volatile, with relatively stable prices.

Investors and traders use implied volatility as an important input in their options trading strategies. For example, if an options trader expects a high level of volatility in an underlying asset, they may choose to buy options with a high implied volatility to benefit from potential price movements. Conversely, if an options trader expects a low level of volatility, they may choose to sell options with a low implied volatility to collect premiums while mitigating risk.

Implied volatility is also used in risk management, as it can help investors determine the likelihood of certain events, such as a significant price move, and adjust their positions accordingly.