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Implied Volatility is the market's own estimate of how much an underlying is likely to move before expiry, expressed as a single number and baked directly into an option's price. It's arguably the single most important input in options pricing after the underlying's own price.

Every option-pricing model (including the standard Black-Scholes model used throughout this site) takes volatility as an input and produces a price as an output. Implied Volatility works the calculation backward: given the price the market is actually charging for an option, IV is the volatility number that, plugged into the model, produces that exact price. It isn't a prediction of direction — it says nothing about whether the underlying will rise or fall, only how large a move the market is currently pricing in either way.

These sound similar but measure different things:

• Historical Volatility looks backward — it's calculated directly from the underlying's actual past price movements over some window (say, the last 30 days).
• Implied Volatility looks forward — it's backed out from current option prices, reflecting what the market expects going forward, not what already happened.

The two often move together but can diverge sharply — IV commonly spikes ahead of a known event (like an earnings release or a policy decision) even when historical volatility has been calm, because the market is pricing in the uncertainty of that specific upcoming event.

Holding spot, strike, and days to expiry all fixed (24,000 spot, 24,000 strike, 7 days to expiry) and only changing IV:

The same option, on the same underlying, at the same strike and expiry, is worth roughly 5x more at 45% IV than at 8% IV — the underlying hasn't moved at all in this comparison; only the market's expectation of how much it might move has changed. This relationship — how much an option's price responds to a 1-point change in IV — is exactly what Vega measures.

"IV crush" describes IV collapsing sharply once the uncertainty that inflated it has passed — most commonly right after a known event. Suppose Nifty is at 24,000, 7 days from expiry, and IV is elevated at 28% ahead of an anticipated event, pricing the at-the-money 24,000 call at ₹386.15.

1. The event passes, and with the uncertainty resolved, IV reverts to a more typical 13%.
2. Nifty itself is unchanged, still at 24,000.
3. The option's price falls to ₹187.62 — a loss of 198.53 points, or ₹12,904 at a 65 lot size, purely from IV collapsing. That's 51.4% of the position's value gone, with the underlying having moved zero points.

This can hurt even when the underlying moves favorably. Suppose instead Nifty actually rises 80 points, to 24,080, at the same time IV crushes to 13%. The option is now worth ₹233.04 — still a net loss of 153.11 points from where it started, despite the favorable move. The IV collapse more than offset the gain from the underlying moving in the right direction — a real, checked outcome, not a hypothetical worst case.

A single IV number (say, 22%) doesn't say much on its own — 22% could be unusually high or unusually low depending on the underlying's typical range. Two common ways to add that context:

• IV Rank measures where current IV sits between its own highest and lowest values over a lookback period (commonly one year), as a percentage. An IV Rank of 80 means current IV is near the top of its own recent range.
• IV Percentile measures the percentage of days in that same lookback period where IV was lower than it is today. An IV Percentile of 80 means IV has been lower than its current level on 80% of days in that window.

Both are ways of asking "is volatility expensive or cheap right now, relative to its own recent history" — a question a bare IV number alone can't answer.

• Buying options when IV is high is expensive — a Long Straddle or Long Strangle opened right before a known event risks exactly the IV-crush scenario worked through above, even if the direction call turns out right.
• Selling options when IV is high collects a richer premium — a Short Straddle, Iron Condor, or Jade Lizard benefits from exactly the same IV collapse that hurts the buyer.
• This is why many traders check IV Rank or IV Percentile before choosing between a buying strategy and a selling one, not just the underlying's expected direction.

• IV can be wrong. It reflects the market's collective expectation, not a guarantee — the underlying can easily move more or less than IV implied.
• High IV isn't automatically a signal to sell, and low IV isn't automatically a signal to buy — IV can stay elevated or depressed for longer than expected, and a "cheap" option can still lose money to time decay while waiting.
• IV crush is predictable in direction but not always in size — the example above uses specific numbers for illustration; the actual size of a real IV collapse depends on how the event itself resolves.