how does implied volatility work 
implied volatility measures the market s expectation of future price fluctuations for a financial instrument such as a stock or option it is derived from the market price of options and reflects investors perceptions of uncertainty or risk associated with the underlying asset s future movements historical volatility vs implied volatilityhistorical volatility hv and implied volatility iv are both measures of volatility in the price of an underlying asset but they differ in their perspective historical volatility looks at past price movements while implied volatility looks forward representing the market s expectations for future price movements despite these differences there is a relationship between the two this is because implied volatility is often influenced by historical volatility when historical volatility has been high market participants may expect that trend to continue leading to higher implied volatility conversely when historical volatility has been low implied volatility may also be lower however implied volatility is not solely determined by historical volatility it also incorporates the market s expectations about future events that could impact the underlying asset s price the difference between historical volatility and implied volatility is sometimes referred to as the volatility risk premium 