




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


 