What is implied volatility (IV)?

The idea

An option's price depends on the spot price, strike, time left, interest rate and expected volatility. Everything except volatility is known, so we solve for the volatility that makes the formula match the traded price. That number is implied volatility, quoted as an annual percentage.

A Nifty ATM IV of 12% means options are priced as if Nifty will move about 12% a year, one standard deviation. Over a few days that scales down with the square root of time.

Why it changes

IV usually rises before known events such as results or the Budget, because uncertainty is higher, and often falls sharply once the event passes. This drop is called IV crush, and it can hurt an option buyer even when the price moves the right way.

What IV does not tell you

IV is about the size of a move, not its direction. A high IV can stay high, and a low IV can stay low. To judge whether IV is high or low, compare it with the same stock's own history using IV rank or IV percentile.