Why Implied Volatility Matters for Your Options Income Strategy
Options Education
What Is Implied Volatility?
Implied volatility, usually shortened to IV, is the market’s expectation of how much a stock will move over a given period, expressed as an annualized percentage. It is derived from current option prices rather than from past price history. An implied volatility of 30% means the options market is pricing in a roughly 30% annualized range of movement in the underlying stock.
This page covers how IV is calculated, how it moves option premiums, how to read the IV column in an option chain, what IV percentile and IV rank measure, and why implied volatility falls after earnings.
The Basics
Where the number comes from
An option pricing model takes several inputs and returns a price. The stock price, the strike price, the time left to expiration, and interest rates are all observable. Volatility is not. It is the one input nobody can look up.
So the market solves the problem backward. Take the price an option is actually trading at, hold every other input fixed, and work out what volatility figure the model would need in order to produce that price. That figure is the implied volatility. It is not a forecast anyone published. It is what the collective pricing of options implies about expected movement.
Implied versus historical volatility
Historical volatility measures how much a stock actually moved over some past window, calculated from realized price data. Implied volatility is forward looking and comes from what buyers and sellers are paying for options right now. Historical volatility describes what happened. Implied volatility describes what the market expects. The two frequently disagree, and the gap between them is itself watched closely by options traders.
What high and low IV actually describe
Implied volatility is a statement about the size of expected movement, not its direction. High IV does not mean the market expects a stock to fall. It means the market expects a wide range of outcomes in either direction.
There is no universal threshold for high. A broad diversified index might typically sit near 15% to 20%. A large technology stock might run 30% to 40%. A high growth single stock can trade above 60% as a matter of routine. A 40% reading is elevated for one name and calm for another, which is why traders judge IV against a stock’s own history rather than against an absolute number.
IV and Pricing
How implied volatility affects option pricing
Higher implied volatility raises option premiums. Lower implied volatility reduces them. Everything else held constant, this is the single most direct relationship in options pricing.
The reason is straightforward. An option only pays off if the stock finishes past the strike. A wider expected range of movement makes that outcome more likely, so a buyer will pay more for the contract and a seller will demand more to write it.
For an at the money option, the relationship is close to proportional. Roughly speaking, doubling implied volatility roughly doubles the premium. That approximation breaks down as strikes move further from the current price, but it is a useful mental model for the contracts that trade most.
Hypothetical Illustration
A stock trading at $100. One 30 day at the money call. Only the implied volatility changes.
| Implied Volatility | Premium | % of Position |
|---|---|---|
| 25% | $2.90 | 2.9% |
| 55% | $6.30 | 6.3% |
Calculated using the standard at the money approximation, premium is roughly 0.4 times price times implied volatility times the square root of time in years. Hypothetical and for illustration only. Not based on any actual security and not a projection of any result. Figures do not reflect commissions, fees, or taxes, and a single period premium should not be annualized.
Option Chain
What IV means in an option chain
The IV column in an option chain shows the implied volatility of each individual contract, calculated from that contract’s own market price. It is not one number for the whole stock. Every strike carries its own reading, and those readings are rarely equal.
| Strike | Moneyness | Premium | IV |
|---|---|---|---|
| $95 | In the money | $6.85 | 29.5% |
| $100 | At the money | $2.90 | 25.0% |
| $105 | Out of the money | $1.05 | 26.8% |
| $110 | Out of the money | $0.35 | 29.2% |
Hypothetical option chain for a stock trading at $100 with 30 days to expiration. For illustration only. Not based on any actual security.
What ATM IV means
ATM IV is the implied volatility of the at the money contract, the strike sitting closest to the current stock price. It is the figure most often quoted as a single headline reading for a stock, because at the money contracts are usually the most heavily traded and the most sensitive to changes in volatility. In the table above, ATM IV is 25.0%.
Why the IV column is not flat
Notice that IV dips at the money and rises as strikes move in either direction. That curve is called the volatility smile, or skew when it tilts to one side. It exists because real stock returns produce more extreme moves than a simple model assumes, and the market prices the outer strikes accordingly. A single stock IV figure quoted without a strike is almost always the at the money reading.
IV Rank
IV percentile and IV rank
A raw implied volatility figure cannot tell you whether volatility is high, because normal differs by stock. Two measures solve that by comparing current IV to the same stock’s own history, usually over the trailing year.
IV percentile is the share of days in the lookback period on which implied volatility was lower than it is today. An IV percentile of 80 means IV has been below its current level on 80% of trading days that year.
IV rank instead places current IV on the range between the period’s low and high. An IV rank of 80 means IV sits 80% of the way from the year’s lowest reading to its highest.
The two often disagree. IV rank is pulled around by a single extreme day, since one spike resets the top of the range for a year. IV percentile is less sensitive to outliers because it counts days rather than measuring distance. Neither predicts direction, and neither is a signal on its own.
What Moves IV
Implied volatility moves with expectation, not with price
IV rises when the market becomes less certain about what happens next, and falls when that uncertainty resolves. A stock can rise sharply while its implied volatility drops, and the reverse happens just as often.
IV Crush
The most reliable pattern in implied volatility is the fall that comes after an event, not the rise before it.
Implied volatility climbs in the days ahead of a scheduled event such as an earnings release, because the range of possible outcomes is wide and the date is known. Once results are out, the uncertainty is gone and IV typically drops sharply. That drop is called IV crush.
Because premiums move with implied volatility, an option bought before earnings can lose value afterward even when the stock moves in the direction the buyer expected. The move was already priced in. The collapse in IV was not offset by it.
Earnings
A scheduled date with an unknown outcome. The clearest driver of single stock IV.
Rates and macro data
Central bank decisions and inflation prints lift volatility across the market, which feeds into individual names.
Company and sector news
Product launches, litigation, regulatory decisions, and merger activity all widen the range of expected outcomes.
Concentration
A single stock carries the full force of its own news. An index dampens the same events, because its constituents are imperfectly correlated.
Both Sides
What IV means to a buyer and to a seller
An option contract gives the buyer the right, but not the obligation, to buy or sell a stock at a set strike price before expiration, in exchange for a premium paid up front. The seller collects that premium and takes on the obligation to fulfill the contract if the buyer exercises.
Implied volatility sits on both sides of that exchange, and it works in opposite directions.
For a buyer, higher IV means paying more for the same contract. The maximum loss is still the premium paid, and that premium is now larger. A buyer entering during elevated IV needs a bigger move to break even, and is exposed to losing value if implied volatility falls before expiration.
For a seller, higher IV means collecting a larger premium. That premium is received regardless of what happens next. But higher IV also reflects a genuinely wider range of possible outcomes, which means a greater chance the contract finishes in the money and the obligation comes due. The larger premium is compensation for real additional risk, not a free improvement in terms.
Income Strategies
Why implied volatility matters to an options income strategy
A covered call strategy holds stock and sells call options against it. The premiums collected are the source of the income the strategy seeks to distribute. Since premiums scale with implied volatility, IV is the input that most directly moves that income.
This explains something investors in covered call funds notice and often find puzzling: distribution amounts move around considerably from period to period even when the underlying holdings have not changed. When implied volatility contracts, there is simply less premium available to collect.
It also explains why volatility levels differ so much between strategies. A fund writing calls on a diversified index is working with index level implied volatility, which is dampened because its constituents do not move together. A fund writing calls on individual holdings is working with single name implied volatility, which is typically higher. That difference in available premium is the reason the two approaches produce different distribution profiles.
The tradeoff runs in both directions and deserves stating plainly. Higher implied volatility means larger premiums, and it also means the underlying stock genuinely is more likely to make large moves, including downward ones. A covered call strategy caps upside above the strike while retaining full downside exposure to the shares it holds. Larger premium income is compensation for accepting that profile, not a way around it. Distributions are not guaranteed, and these strategies are not suitable for all investors.
See how REX covered call ETFs write at the individual stock level
Common Questions
Implied volatility questions, answered
Implied volatility, usually shortened to IV, is the market’s expectation of how much a stock will move over a given period, expressed as an annualized percentage. It is derived from current option prices rather than from past price history. An implied volatility of 30% means the options market is pricing in a roughly 30% annualized range of movement in the underlying stock.
In options, implied volatility is the volatility figure that, when entered into an option pricing model, produces the option’s current market price. Every other input to the model is observable: the stock price, the strike price, time to expiration, and interest rates. Implied volatility is the one unknown, so it is solved for backward from the price the option is actually trading at.
Higher implied volatility raises option premiums and lower implied volatility reduces them, holding everything else constant. A higher expected range of movement makes it more likely an option finishes in the money, so buyers pay more for it. For an at the money option, premium moves roughly in proportion to implied volatility: doubling IV roughly doubles the premium.
The IV column in an option chain shows the implied volatility of each individual contract, calculated from that contract’s current market price. IV usually differs from strike to strike rather than staying constant. At the money contracts typically show the lowest IV, with figures rising as strikes move further in or out of the money. That pattern is called the volatility smile or skew.
ATM IV is the implied volatility of the at the money option, meaning the contract whose strike price is closest to the current stock price. It is commonly used as the single headline reading for a stock’s implied volatility because at the money contracts are usually the most actively traded and the most sensitive to changes in volatility.
IV percentile measures where current implied volatility sits relative to its own history, usually over the trailing year. An IV percentile of 80 means implied volatility has been lower than its current level on 80% of days in that period. It answers whether IV is high or low for this particular stock, which a raw IV figure cannot, because a 40% reading is calm for one stock and elevated for another.
There is no fixed threshold, because normal implied volatility differs by stock. A large diversified index might sit near 15% to 20%, a mega cap technology stock near 30% to 40%, and a high growth single stock above 60%. High is best assessed relative to that stock’s own history using IV percentile or IV rank rather than against an absolute number.
Historical volatility measures how much a stock actually moved over a past period and is calculated from realized price data. Implied volatility is forward looking and is derived from what buyers and sellers are currently paying for options. Historical volatility describes what happened; implied volatility describes what the market expects.
IV crush is the sharp fall in implied volatility that typically follows a scheduled event such as an earnings release. Implied volatility usually rises ahead of the event as uncertainty builds, then drops once the outcome is known. Because premiums move with implied volatility, an option can lose value after the event even when the stock moves in the direction the buyer expected.
Important Information
This material is for educational purposes only. It is not investment advice, not a recommendation to buy or sell any security, and not an offer of any product or strategy. Options involve risk and are not suitable for all investors.
All premium figures, implied volatility levels, and option chain data shown on this page are hypothetical and are provided solely to illustrate the relationships described. They are calculated using a standard at the money approximation, are not based on any actual security, do not reflect commissions, fees, bid ask spreads, or taxes, and are not a projection of any result. A premium collected over a single period should not be annualized. Past performance is not indicative of future results.
Covered call strategies limit potential gains above the strike price of the options written while retaining the full downside risk of the underlying holdings. Distributions from any fund employing an option writing strategy are not guaranteed, may vary substantially from period to period, and may include return of capital, which reduces net asset value and an investor’s cost basis. Past distributions are not indicative of future distributions.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about REX ETFs, please visit rexshares.com or call 1-844-802-4004. Read the prospectus carefully before investing.
Standardized options disclosure: before engaging in options transactions, investors should read Characteristics and Risks of Standardized Options, published by The Options Clearing Corporation.
Distributed by Foreside Fund Services, LLC. Last reviewed August 2026.
