ForecastingStocks

Implied volatility (IV) is the volatility the market is currently pricing into an option. It is not a forecast you compute from history — it is extracted by working a pricing model backwards: given the option's market price, what volatility must the market be assuming?

Historical volatility = how much the underlying HAS moved (backward-looking)
Implied volatility    = how much the market EXPECTS it to move (forward-looking, from the option price)

Why it is the number that matters most

Two options on the same stock with the same strike and expiry can cost very differently — the difference is IV. When traders say an option is "expensive" or "cheap," they almost always mean its IV is high or low, not its dollar price.

A worked intuition

Option premium observed in the market = 6.00
Plug the other four inputs into Black-Scholes,
solve for the volatility that outputs 6.00
-> that volatility is the implied volatility.

How to use it

High IV — options are expensive. Favours sellers (you collect rich premium) and punishes buyers.
Low IV — options are cheap. Favours buyers.
IV rank/percentile tells you whether current IV is high or low relative to that asset's own history — far more useful than the raw number.

The honest pitfall

IV mean-reverts. It spikes into events (earnings, decisions) and collapses afterward — the vol crush from the vega lesson. Buying high-IV options and then watching IV normalize is one of the most reliable ways to lose money while being right about direction. Always ask "is volatility cheap or expensive right now?" before choosing to buy or sell.