Definition
Volatility measures how much an asset's price moves around its average over a given period. A stock that swings widely from day to day is highly volatile; one that drifts gently is low-volatility. It is typically expressed as an annualized percentage.
Two forms matter for options. Historical volatility looks backward at how the price actually behaved. Implied volatility looks forward — it is the volatility the market expects, derived from current option premiums. Implied volatility is the input traders watch most closely.
Why it matters
How it works
Because an option gives the right to act only if the price moves favorably, greater uncertainty about future prices makes that right more valuable. This is why rising volatility lifts premiums even when the underlying has not moved.
Implied volatility tends to spike before known events, such as earnings announcements, and then collapse once the uncertainty resolves — a pattern called a volatility crush. Traders therefore evaluate not only where they think a stock is heading but whether implied volatility is unusually high or low relative to its own history.