Implied volatility shows how volatile the market may be in the future a critical component of a trades probable success. Although it doesnt help forecast a markets direction, implied volatility (IV) shows the likelihood an instrument will reach a specific price by a certain time, which can help you make trade decisions.

Understanding IV means you can know the markets opinion each time you enter an options trade. Many traders try to use IV to find bargains (i.e., mispriced options based on the assumption IV is too high or too low), but options trade at a certain IV for a reason. The following discussion defines IV, explains its relationship to probability, and demonstrates how it measures the odds of a successful trade.