The market's forecast of future movement embedded in option prices — high IV = expensive options.
Implied Volatility (IV) is the expected magnitude of future price movement implied by current option premiums. High IV means options are expensive (the market expects big moves — often around events like CPI or FOMC); low IV means they're cheap. IV is mean-reverting: it spikes around fear and collapses after the event ('vol crush'). Practical rule: buying options when IV is elevated means you can be right on direction and still lose money as IV deflates. Check IV before entry — it's the price tag on your conviction.
Direction is only half the options trade. The other half is whether you overpaid for the move. IV is how you know.
You buy SPY puts an hour before CPI at 38% IV. CPI hits, SPY dips $2 — but IV collapses to 24% and your puts barely gain. Right on direction, wrong on vol. The checklist item: check IV first.
The RRR Daily Trading Checklist — the exact morning routine LA Traders runs before every New York session. Free.
Get the Free Checklist