Implied volatility and the volatility smile

8 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Implied volatility (IV) is the volatility number that, put into a pricing model, gives the option's market price. It is the market's expectation of future movement. Historical volatility measures how much the share actually moved in the past.

When IV is high (before earnings, during crises) options are expensive; buyers need bigger moves to profit and sellers are paid more. After the event, IV often collapses ("IV crush"), so even a correct directional guess can lose money.

IV is not the same for every strike. Equity index options usually show a skew: lower-strike puts carry higher IV because investors pay up for crash protection. The VIX index measures the 30-day implied volatility of S&P 500 options and is called the "fear gauge".

Key takeaways

IV is the market's forecast of future movement.
IV crush after events can sink correct directional bets.
Index puts carry a volatility skew; VIX measures S&P 500 IV.

Check your understanding

1. You buy calls before earnings, the share rises 2%, yet the calls fall in value. Most likely cause?

Dividend
IV crush after the announcement
Assignment
A broker error

Show the answer

IV crush after the announcement. Implied volatility dropped once the uncertainty passed.

2. The VIX measures...

Trading volume
Expected 30-day volatility of the S&P 500
Interest rates
Gold prices

Show the answer

Expected 30-day volatility of the S&P 500. It is derived from S&P 500 option prices.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.