IV, or Implied Volatility, is a critical parameter in option pricing models, representing the market's expectation of future volatility in the underlying asset.
Unlike historical price data, IV is inferred from option market prices. Therefore, IV reflects current market conditions and participants' expectations, providing valuable insights into market volatility.
High IV indicates a market expectation of significant future price fluctuations, implying higher risk and uncertainty, while low IV suggests a market expectation of smaller price fluctuations, indicating relative stability.
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