Implied Volatility (IV) works as a market forecast by helping investors understand the price movements of an option. It is an important indicator of future volatility of an underlying stock.
A high IV indicates that the market will witness intense movements in the price of a particular stock and a low IV indicates that the market won’t be expecting much movement in the price of a stock.
Implied Volatility as a metric is usually expressed in percentage and is impacted by the demand and supply of a particular stock. If the price increases, the demand increases and consequently the IV increases too. When the price drops, the demand for the stock drops too and this decreases Implied Volatility.
Understanding IV helps traders identify good entry and exit points for trading.