Implied Volatility and the Expected Move
Option prices translate into a market expectation of how far a security will move. It is useful information even to someone who never trades an option.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- Implied volatility is the volatility input that makes a model match the market price.
- It rises before scheduled events and falls immediately after them.
- It converts into an expected move over a stated period.
- The expected move is what a result has to beat to be a surprise.
- Implied volatility differs across strikes, which is the skew.
MAD Academy Training Video · 0:46
The Move the Market Has Already Priced
Implied volatility converts into a dollar range, and that range is the bar your trade has to clear rather than the direction.
This lesson is part of a Stock Alerts + Tools plan.
What it is
Implied volatility is not a forecast published by anyone. It is the number that, put into a pricing model, produces the price the option is actually trading at. It is therefore a summary of what buyers and sellers collectively expect, expressed as an annualised percentage.
That makes it observable rather than estimated, which is unusual among forward-looking measures. It also inherits the model's assumptions, which is why it varies across strikes rather than being a single property of the security.
It is directionless. A high implied volatility says a large move is expected and says nothing about which way, which is the same limitation that applies to a Bollinger squeeze.
Converting it into an expected move
expected move ≈ price x implied volatility x sqrt(days / 365)
- implied volatility is expressed as a decimal and annualised
- the result is approximately a one standard deviation move over that period
A $200 security with a 30 percent implied volatility over 30 days has an expected move of roughly $17, or about 8.6 percent. That is the range within which the market is pricing roughly a two-thirds chance of the outcome falling.
This is the most useful output for someone who never trades options. It is a direct, market-derived answer to how large a move is already priced, which is exactly the question a reaction to an earnings release should be judged against.
The pattern around events
Implied volatility rises ahead of a scheduled event because the range of outcomes widens, and it collapses immediately afterwards once the outcome is known. That collapse is frequently described as a volatility crush.
| Point in time | Implied volatility | Effect on a long option |
|---|---|---|
| A week before earnings | Elevated and rising | The premium is expensive |
| The day before | At its peak | The most expensive point in the cycle |
| Immediately after the release | Falls sharply | The premium loses value on the collapse alone |
| A week after | Back near its base level | The event is fully priced out |
This is the mechanism behind a common outcome: a security moves in the predicted direction after results and a long option position still loses money, because the volatility collapse removed more premium than the move added.
Scroll the chart sideways to see all of it.
Skew, and what it says
Implied volatility is not constant across strikes. In equity markets, out-of-the-money puts typically carry higher implied volatility than equidistant calls, producing a downward-sloping curve across strikes.
- It reflects that downside moves are historically larger and faster than upside ones.
- It also reflects persistent demand for downside protection from holders of the underlying.
- It means downside protection is systematically more expensive than upside exposure.
- The shape steepens in stress, which is itself watched as a positioning indicator.
The skew is a market-derived statement that the distribution has a fatter left tail than a normal distribution implies, which is the same observation the Bollinger article makes from the return series directly.
Implied against realised
Implied volatility is what the market expects; realised volatility is what actually happened. The relationship between them over time is one of the more studied observations in this area.
Across long periods, implied volatility on equity indices has generally exceeded subsequent realised volatility. The gap is usually described as a variance risk premium: buyers of protection pay more than the eventual outcome justified, on average, which is the compensation sellers receive for bearing the risk.
| Condition | Typical relationship |
|---|---|
| Calm markets | Implied above realised, and the gap is the premium |
| A volatility spike | Realised exceeds implied, sharply and briefly |
| After a spike | Implied stays elevated while realised falls, restoring the gap |
The second row is where every strategy built on collecting the premium loses, and it explains the return profile such strategies produce: a steady collection of the gap, punctuated by the episodes in which it inverts.