Implied volatility is a parameter that is part of an option pricing model, typically some derivation of the Black-Scholes model, which gives the theoretical price of an option. Implied volatility shows how the marketplace views where volatility should be in the future. Since implied volatility is forward-looking, it helps us gauge the sentiment or expectation about the volatility of a stock or the market. However, and this is very important, implied volatility does not forecast the direction in which an option is headed. It gauges magnitude, not direction.
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