There are three primary reasons why Implied Volatility is important.

The first reason to use Implied Volatility is to understand market sentiment. Implied volatility can be a great way to understand how much stock movement traders are anticipating. High Implied Volatility suggests that the market expects significant price movement up or down, while low Implied Volatility indicates that the market anticipates minimal price movement. Understanding how Implied Volatility compares to historical levels informs traders if the market is more or less volatile than usual, which may impact their trading strategy.

The second reason to use Implied Volatility is to identify potential options mispricing. Volatility is a crucial input into options pricing models. By tracking Implied Volatility levels, traders can see which strike prices have relatively cheap or expensive options, providing them with an advantage when buying or selling securities.

The third reason Implied Volatility is important is to assess market risk. Implied Volatility shows traders and investors how concerned the market might be about the risk of sharp stock price changes. The visuals included in SpotGamma’s Volatility dashboard provide a view of Volatility Skew and Term Structure, which is critical for any investor that needs to hedge their portfolio exposure.