Implied Volatility 28% Example, Why Option Premium Calculation Matters?

Implied volatility is the market's expectation of "how much the stock will swing" as reflected in option prices.

The option premium is the market price, and it embeds time value and volatility expectations.

Retail investor: "If IV is high, is it always expensive?" Yes, it is, but the reasons vary, such as heavy demand or uncertainty before events (earnings, regulation, etc.).

What exactly is implied volatility?

Implied volatility: the annualized volatility derived by inverting option prices.

(Note) The option market prices future volatility, and that quoted number is called implied volatility.

Implied volatility → the market's expected annual standard deviation of future prices.

Why does it matter for option premium?

For the same underlying, strike, and maturity, higher IV raises both call and put premiums.

(Note) Higher volatility increases the chance of large moves, so insurance (options) costs more.

Where is Black-Scholes used?

Black-Scholes: a representative formula to compute theoretical option prices.

(Note) You can input price to get IV, or input IV to get theoretical premium.

Calculation example with hypothetical numbers

Underlying price: 100

Strike: 105

Time to maturity: 0.25 year (3 months)

Risk-free rate: 2% annual

Observed market call option price (premium): 3.20

By inputting the premium into Black-Scholes and inverting, you can derive implied volatility.

Example result (hypothetical): Implied volatility: 28%

(Note) Inputting IV 28% into Black-Scholes yields a theoretical call value ≈ 3.20.

Simplified calculation steps:

→ Step 1: Prepare time, interest rate, underlying price, and strike.

→ Step 2: Input the market premium.

→ Step 3: Adjust IV until Black-Scholes output equals the market price; that IV is implied volatility.

Three common misconceptions

1) "If IV rises, I always lose", not true, as higher IV is a cost for buyers but a profit factor for sellers.

2) "It always equals realized volatility", not true, because implied volatility is an expectation and can differ from realized volatility.

3) "Black-Scholes is always correct", not true, since its assumptions on underlying distribution, tail events, and transaction costs differ from reality.

So, what to check first

→ 1. Before trading, check the IV smile across options with the same strikes and maturities.

→ 2. Observe IV changes before and after events (earnings, rates, etc.).

→ 3. If you are buying, check whether IV is high; if selling, check whether IV is low.

For reference only.

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※ Numbers are hypothetical examples. Verify current data and calculations before any trade.

※ Options are complex products. Fully understand structure and risks.

※ Numbers reflect the time of writing and may change.

This article is for information only and is not investment advice.