What is the market paying for when it pays for uncertainty?
Two options on two different stocks both cost $2.00. Are they equally expensive? The question is meaningless until you know how much movement each is pricing. Implied volatility is the number that makes the comparison possible, and it is the most misunderstood field on any options screen.
Implied volatility is solved backwards
A pricing model takes strike, spot, time, rates and an expected volatility, and returns a price. Implied volatility inverts that: take the price the option actually trades at, and solve for the volatility figure that would produce it.
So IV is not a forecast anybody published, and it is not the stock's past volatility. It is a restatement of the traded price, expressed as an annualised percentage of expected movement. When someone says "IV is 40%," they are describing what buyers and sellers are collectively paying for, not predicting anything.
The arithmetic, with a usable approximation
For an at-the-money option there is a standard back-of-envelope formula that gets you remarkably close:
ATM premium ≈ 0.4 × spot × IV × √(years to expiry)
Stock at $100, expiry in 30 days (T = 30/365 ≈ 0.082, so √T ≈ 0.287):
- At IV 20%: 0.4 × 100 × 0.20 × 0.287 ≈ $2.30
- At IV 40%: 0.4 × 100 × 0.40 × 0.287 ≈ $4.60
Same stock, same strike, same expiry date. Double the implied volatility, double the premium. Nothing about the company changed. Only the market's expectation of movement did.
Why options get expensive before earnings
An earnings report is a scheduled event with a wide, roughly two-sided range of outcomes sitting inside the option's life. Buyers bid for exposure to it and writers demand compensation for it, so IV on contracts spanning the report rises — often dramatically, and usually only on the near-dated expiries that actually contain the date.
You can read the resulting expectation directly. The rough one-standard-deviation implied move over the option's life is:
spot × IV × √T = 100 × 0.40 × 0.287 ≈ $11.50, about 11.5%
That is the market saying, in the only language it has, "we think this thing moves about 11% by then, one way or the other."
The crush
The day after the report, the uncertainty is resolved regardless of the answer. IV falls back toward its normal level — here, 20%. Apply the formula again and, with the stock unchanged and a day less on the clock, that $4.60 option is worth roughly $2.30.
A 50% loss on a view that was, in a sense, correct: nothing happened. Worse, a directionally right buyer can still lose. Suppose the stock rises 2% — a real move, in the right direction, but small against the 11.5% the option was priced for. Once the crush lands, that $4.60 call is worth roughly $3.40: a loss of about $1.20 a share, a quarter of the premium, on a call that got the direction right.
The reason is that the crush and the move are pulling on the same premium in opposite directions, and at these numbers the stock has to rise close to 4% before the direction wins. Below that, being right is not enough.
This is why "options are expensive before earnings" is not a complaint about pricing — it is a description of what you are buying. You are not buying the event. You are buying it at a price that already contains everybody else's expectation of the event.
What IV is good for
Not prediction. Comparison. IV lets you ask whether this contract is dear or cheap relative to the same stock's own options a month ago, relative to a different expiry, or relative to what the stock has actually delivered historically. Those are observations about pricing. They are not signals, and this course will not turn them into any.
In the data
On a chain, implied volatility arrives already solved. Apple's is below, in the Terminal's options view, as the IV column beside every strike.
Open Apple's chain with IV and the Greeks in the EODHD Terminal
A published IV means a model has already run: someone chose the pricing model, the interest rate, the dividend assumption and which price to invert (bid, ask or midpoint), and none of those choices is printed beside the number. It will not generally match what you would back out yourself from the same contract's bid and ask, and neither of you has made a mistake.
Try it now
- Apple's 2026 earnings reports are below; the next one is the last date in the table, the one that shows only an estimate. In the chain linked above, read the at-the-money IV for the expiry just after that report, and again for one a few months out. The near one is usually markedly higher.
- Compute the implied move for the near expiry: spot × IV × √(days/365). Compare it with how far the stock actually moved after its last few reports: the report dates are in the table above, and the chart below covers the past year. Measure from the close before each report date to the close a week after it.
- After the report lands, read the same near-dated contract's IV again in the Terminal and note where it went. Record what happened to the premium even on days the stock barely moved. Observation only — you are learning to read the instrument, not to trade it.