High Implied Volatility describes a market condition where the expected future price fluctuation of an underlying asset, as derived from the prices of its options contracts, is significantly elevated. This indicates a collective market perception of substantial price movement potential, regardless of direction.
Mechanism
Implied volatility is calculated from options prices using models such as Black-Scholes. When options premiums increase, it suggests higher implied volatility, reflecting a greater demand for options as hedging instruments or speculative vehicles in anticipation of significant market events.
Methodology
Trading strategies under high implied volatility often prioritize selling options to capitalize on inflated premiums, as the market is pricing in large expected moves. Conversely, buying options becomes expensive. The methodology involves assessing whether current implied volatility accurately reflects expected future realized volatility, positioning to profit from anticipated contraction or continued expansion of price swings.
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