Back-solve for IV from any option's market price using Black-Scholes.
IV is relative — what's 'high' depends on the underlying. For a stable stock like AAPL, an IV of 40% might be elevated; for a volatile biotech, 40% could be low. A useful benchmark is comparing current IV to its historical range using IV Rank (IVR) or IV Percentile. An IVR above 50 is generally considered elevated.
Implied volatility is directly proportional to an option's extrinsic (time) value. Higher IV means the market expects larger price swings, so options are priced with more premium. This benefits sellers (more premium to collect) but makes buying options more expensive. A 1% increase in IV raises the option price by approximately its Vega value.
Historical volatility (HV) measures how much the stock has actually moved in the past, based on realized price data. Implied volatility (IV) is forward-looking — it's what the market is pricing in for future moves. When IV is significantly higher than HV, options are considered expensive; when IV is lower than HV, they are considered cheap.
IV crush is a sharp drop in implied volatility immediately after a major event — most commonly an earnings announcement. Before earnings, IV spikes as the market prices in uncertainty. Once the news is out, uncertainty drops and IV collapses, often cutting option values in half even if the stock moves in the right direction.
When IV is high relative to its historical range, options are expensive — generally a better environment for selling options (collecting inflated premium). When IV is low, options are cheap relative to expected moves — generally a better time to buy. This is a core principle of volatility-based options trading, often summarized as 'buy low IV, sell high IV.'