Implied volatility (IV)

How IV is obtained

An option pricing model takes the underlying price, strike, time to expiry, interest rate, dividends and a volatility input, and returns a theoretical price. Implied volatility runs that model backwards: given the market price, find the volatility input that matches it. Since the market price is a quote, IV is only as precise as the quote, and providers computing IV from different quote snapshots or rate assumptions will publish slightly different values.

IV is expressed as an annualised percentage. A rough daily figure is obtained by dividing by the square root of the number of trading days in a year, which is a convention rather than a forecast.

IV is not one number

• Across strikes at one expiry, IV forms the smile; when one wing is higher than the other, the asymmetry is the skew.
• Across expiries at the money, IV forms the term structure; an inverted term structure, with near-dated IV above long-dated IV, is one of the states the volatility dashboard names.
• At-the-money IV (ATM IV) is the single figure most often quoted for an underlying, and it is a summary of the surface, not the surface.
• Realized volatility is measured from the underlying's past returns; IV is inferred from option prices. The two can differ for long periods and the gap is not a mispricing by itself.

IV inside gamma exposure

Gamma depends on implied volatility. A lower IV concentrates gamma near the strike; a higher IV spreads it out. Any GEX figure computed from a chain therefore depends on the IV column of that chain, and a chain without IV cannot produce gamma at all. When two GEX dashboards disagree, the IV inputs, and the model used to turn them into gamma, are among the first things to compare.

In Senzoukria

ATM IV is displayed on the desktop's welcome screen once a gamma snapshot has been fetched, and the GEX module's Volatility page draws the IV Smile across strikes and the IV Term Structure across expiries from the loaded chain; the term structure needs at least two expirations with ATM IV data before it is drawn. The module states plainly when the chain carries no implied volatility, because nothing on that page can then be computed, and the gamma profile reports how many legs were skipped for missing volatility or time. The site's /volatility page shows the same charts on a generated surface as a demonstration.

IV values come from the options source the user configures and carry that source's delay and model conventions.

Common mistakes

• Comparing IV from two providers as if they used the same model, rate and quote timing.
• Quoting ATM IV as the volatility of every strike.
• Treating an IV below realized volatility as an automatic buying opportunity for options.
• Filling a missing IV cell with a neighbouring value when computing gamma, which invents exposure.