Implied Volatility (IV) in Options Trading: Everything You Need to Know

In options trading, Implied Volatility (IV) is one of the key factors that determines your profits and losses. Many beginners get confused by this concept, but it’s simply the market’s forecast of future price volatility.

Two Types of Volatility—Don’t Mix Them Up

Historical Volatility (HV) = Looks Backward: The actual volatility of an asset over the past 20 or 60 days; it’s what has already happened.

Implied Volatility (IV) = Looks Forward: The market’s prediction of how the asset will move; it’s the collective expectation of traders. Both metrics are shown as annualized rates.

Simply put, HV is the rearview mirror, IV is the windshield.

How IV Affects Option Prices

Option prices (also called premiums) consist of two parts:

• Intrinsic Value: Depends only on the current price and strike price
• Time Value: Depends on time and… IV

The higher the IV → the greater the expected volatility → the more expensive the option. The degree of this impact is measured by “Vega”: for every 1% change in IV, how much does the option price change.

For Example:

You hold a BTC call option, current price is 20,000 USDT, strike price is 25,000 USDT.

• High IV = Market thinks BTC could surge → your option is valuable
• Low IV = Market thinks BTC will rise steadily → your option isn’t worth much

Option buyers want more volatility (big moves are profitable), while sellers want less (low volatility is safer).

The Dual Impact of Time and Strike Price

Time Factor:

• The longer the maturity, the greater the impact of IV (far-dated options rely more on volatility expectations)
• The shorter the maturity, the more accurate the volatility expectations (higher probability of knowing if price will move)

Strike Price Factor: IV often forms a “smile curve”:

• ATM (at-the-money) options: lowest IV
• The further out-of-the-money (OTM): the higher the IV

Why? Two reasons:

1. OTM options require larger price moves to be profitable
2. Sellers face higher hedging costs, so they demand higher IV compensation

IV Trading in Practice: Overvalued or Undervalued?

Key judgment criteria:

IV > HV = IV is overvalued

• Market is overly fearful or greedy
• Consider selling options (short Vega strategies, such as short straddles)

IV < HV = IV is undervalued

• Market is asleep, not fully pricing in volatility
• Consider buying options (long Vega strategies, such as long straddles)

Key Point: Compare HV across different timeframes

• Long-term HV (60 days) shows the average level
• Short-term HV (1-5 days) shows recent volatility
• Both are high + IV even higher = Seriously overvalued
• Both are low + IV even lower = Potential undervaluation

Trading IV on Gate Is Simple

On the options trading interface, simply select “IV Mode” to place orders based on implied volatility. Note: Your order price will change in real time as the underlying asset price moves or as expiration approaches.

Quick Takeaways

• IV is the market’s consensus price for future volatility
• When IV > HV, consider selling options to earn premium
• When IV < HV, consider buying options to bet on volatility
• The longer the term, the more influence IV has
• You can combine with Delta hedging to keep your position neutral

In simple terms: If you’re bearish on volatility, sell options; if you’re bullish on volatility, buy options. Don’t overcomplicate it.