Implied volatility
What do option prices promise about future swings, and why can't a price chart alone tell you that number?
In plain words
Implied volatility is the size of future price swings that option prices are currently pricing in, worked backwards from the option's market price. Unlike realised volatility, which measures swings that already happened, it reflects what traders are willing to pay for protection or leverage.
Why it matters
Two markets can show the same past price path but very different option prices, because implied volatility carries expectations and hedging demand. Comparing implied to realised volatility shows whether protection is priced richly or cheaply relative to recent movement, which affects the cost of using options for hedging or speculation.
In a real week: BTC, week of 12 March 2018
In the week of 12 March 2018, BTC fell 14.09%, spanning a range of 35.06% from its Monday high of 9888.88 to its Sunday low of 7322.00, with realised volatility of 135.3% annualised. This dataset contains only realised swings from hourly candles, so no implied volatility figure exists for the week. The 135.3% measures what happened, not what traders expected.
A common mistake
Treating realised volatility as a stand-in for implied volatility. Realised volatility is a historical measurement; implied volatility is an expectation embedded in option prices and can be far above or below recent realised swings.