Implied Volatility (IV)

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Definition of 'Implied Volatility (IV)'

Implied volatility (IV) is a measure of the expected volatility of a security or portfolio over a specific period of time. It is calculated using the prices of options on the security or portfolio.

IV is often used as a proxy for the true volatility of the underlying security, but it is important to note that IV is not the same as historical volatility. Historical volatility is the actual volatility of the security over a period of time in the past, while IV is a forward-looking measure of volatility.

There are a number of factors that can affect IV, including the time to expiration of the option, the strike price of the option, the underlying asset's price, and the level of market liquidity.

IV is an important concept for option traders to understand, as it can have a significant impact on the price of an option. In general, the higher the IV, the more expensive the option will be. This is because IV reflects the market's expectation of volatility, and a higher level of volatility means that there is a greater chance that the option will expire in the money.

IV can also be used to hedge against volatility. For example, if an investor is concerned about the volatility of a particular stock, they could buy an option on the stock with a high IV. This would protect the investor from losses if the stock's price were to move sharply in either direction.

IV is a complex concept, but it is an important one for option traders and investors to understand. By understanding IV, investors can make more informed decisions about when to buy and sell options.

Here are some additional resources that you may find helpful:

* [The Options Industry Council: Implied Volatility](https://www.theoic.org/options-education/what-is-volatility/implied-volatility)
* [Investopedia: Implied Volatility](https://www.investopedia.com/terms/i/impliedvolatility.asp)
* [Cboe: Implied Volatility](https://www.cboe.com/learn/trading/options/volatility/implied-volatility)

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