Kardec Trader explains implied volatility: the market's expectation of a stock's move. A $50 stock with 20% IV means a 68% probability it moves between $40 and $60 by expiration. IV shrinks as expiration approaches, dropping from 20% to 15% with five days left.
68%
Stock price $50; IV 20% for that expiration.
Between $40 and $60.
From 20% down to 15%.
So then we have something called implied volatility. This tells us how much the market is expecting the stock to make a move. It uses a standard deviation of 68%. Here's an example, right? A stock price is $50 and we have the IV of that stock, 20% for that expiration. So that means that you take 20% of that $50 and we pretty much draw a graph like this. 40 and 60. In that expiration, there's a 68% ch. The stock price is going to move between 40 and $60. As the time gets less and less, this decreases. Because as time progresses and we get closer to that expiration, what's going to happen to this 20%? Is this number is going to decrease? If it's 20% right now, let's say we have five days left now, this is going to go to 15%. So this volatility starts to get less and less. And when it gets less and less, the expected move starts to be much smaller than where it started from.
