




The implied volatility of an asset is an estimate of volatility, or rate of price change, for the asset. In mathematical finance, volatility is defined as the annualized standard deviation of daily price changes. Thus, past volatility is known from historical data. Implied volatility can be interpreted as the market expectation of future volatility. The phrase implied volatility comes directly from how it is derived. Theoretical option pricing models, such as BlackScholes, compute the price for an option on an asset from a small number of variables including volatility. Implied volatility results from treating volatility as the unknown, then using market price to solve for volatility. For a stock, the implied volatility would likely be computed from a weighted average of the implied volatility suggested by the prices of many different options on that stock. Implied volatility is normally denoted as σ, or sigma. In practice, implied volatility seldom matches historical volatility. Hedge funds can develop trading strategies based upon volatility that exploit this difference between historical volatility and implied volatility.
Rate this implied volatility definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: FICO score, dividends payable, VIX, average price per share, deferred tax, inflation, liquidity ratio, 144a, in escrow, per diem, command economy, annual return, open position, quality assurance, labor relations, stock market close, retained earnings, FTSE, Zero Cost Collar, diluted share, deferred revenue, debt service coverage, irrevocable trust, LIBOR, implied volatility, 401a, risk management, current ratio, 1035 exchange, option premium, EBITDA, Key Rate Duration, minority interest, whollyowned subsidiary, required rate of return, cancelled check, real GDP, reverse mortgage, exdividend date, margin rate, APR, covered put, stock split, exdividend, class C shares, limit order, 1031 exchange, phantom income, balance sheet


 