What Implied Volatility Tells You
Implied volatility (IV) is the market’s forecast of how much a stock will move. It’s derived from options prices. For biotech stocks approaching an FDA catalyst, IV spikes dramatically — from 60% to 300% or higher in the week before a PDUFA date. This spike reflects the market’s consensus that a big move is coming. It just doesn’t tell you which direction.
How to Calculate the Expected Move
The expected move is the range the market believes the stock will trade within after the catalyst. You can estimate it using the at-the-money straddle price.
If a stock trades at $50 and the weekly ATM straddle costs $15, the market implies a move of roughly 30% in either direction. This is not a prediction — it’s a consensus estimate based on thousands of options traders’ bets. It is often remarkably accurate at estimating absolute move size.
IV Crush: The Hidden Tax on Binary Events
After a binary catalyst resolves, uncertainty drops to zero. IV collapses from its pre-event spike, and options prices crater regardless of which direction the stock moves.
Even if you correctly predict direction, you can lose money on options if the actual move is smaller than the implied move. This is why many experienced traders prefer stock positions over options for binary events. When traders do use options, they often use strategies that benefit from IV crush rather than being hurt by it — selling straddles or iron condors.
Using IV as a Catalyst Ranking Signal
IV represents the collective wisdom of the options market. A stock with 200% IV before a PDUFA date is a very different setup than one with 80% IV. IV is one of the market reality multipliers used in advanced catalyst scoring systems. Combined with short interest and relative volume, it helps distinguish between catalysts that are theoretically important and catalysts the market is actually positioning for.
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