The market's expectation of future price volatility embedded in current option prices, derived by working backwards through option pricing models. Higher implied volatility increases option premiums, as greater expected price swings make options more valuable.
From Latin 'implicare' meaning 'to enfold/involve' and 'volutilis' meaning 'rolling/turning.' The term developed with sophisticated option pricing models in the 1970s, representing volatility that is 'implied' or hidden within market prices rather than directly observed.
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