An option's price is really a price on uncertainty. The more the market expects a stock to move, the more both calls and puts cost — and that expectation is captured by implied volatility.
What sets the premium
| Driver | Effect on premium |
|---|---|
| Implied volatility (IV) | Higher expected movement → richer premium. |
| Time to expiry | More time → more chance to move → more time value. |
| Moneyness | Distance from the strike sets the intrinsic vs. time-value split. |
Implied vs. realized volatility
Implied volatility is the market's forecast baked into today's price; realized volatility is what the stock actually does. Buyers win when realized exceeds implied; sellers win when it doesn't. That gap is the heart of most options trading.
Beware the IV crush: before an earnings report, IV is often inflated and options are expensive. The moment the news is out, uncertainty collapses, IV falls hard, and a long option can lose value even when you guessed the direction right.
Why this matters
Buying when IV is high means you have paid up for movement that must then exceed an elevated bar. Checking whether IV is high or low relative to its own history is often more important than picking the direction.
