Implied Volatility Range

The Implied Volatility Range is a forward-looking tool that transforms option market data into probability ranges for future prices. Based on the lognormal distribution of asset prices assumed in modern option pricing models, it converts the implied volatility curve into a volatility cone with dynamic labels that show the market’s expectations for the price distribution at a specific point in time. At the selected future date, it displays projected price levels and their percentage change from today’s close across 1, 2, and 3 standard deviation (σ) ranges:

• 1σ range = ~68.2% probability the price will remain within this range.
  
• 2σ range = ~95.4% probability the price will remain within this range.
  
• 3σ range = ~99.7% probability the price will remain within this range.
  

What makes this indicator especially useful is its ability to incorporate implied volatility skew. When only ATM IV (%) is entered, the indicator displays the standard Black–Scholes lognormal distribution. By adding High IV (%) and Low IV (%) values tied to strikes above and below the current price, the indicator interpolates between these inputs to approximate the implied volatility skew. This adjustment produces a market-implied probability distribution that indicates whether the option market is leaning bullish or bearish, based on the data entered in the menu:

• ATM IV (%) = Implied volatility at the current spot price (at-the-money).
  
• High IV (%) = Implied volatility at a strike above the current spot price.
  
• High Strike = Strike price corresponding to the High IV input (OTM call).
  
• Low IV (%) = Implied volatility at a strike below the current spot price.
  
• Low Strike = Strike price corresponding to the Low IV input (OTM put).
  
• Expiration (Day, Month, Year) = Option expiration date for the projection.
  

Once these inputs are entered, the indicator calculates implied probability ranges and, if both High IV and Low IV values are provided, adjusts for skew to approximate the option market’s distribution. If no implied volatility data is supplied, the indicator defaults to a lognormal distribution based on historical volatility, using past realized volatility over the same forward horizon. This keeps the tool functional even without implied volatility inputs, though in that case the output represents only an approximation of ATM IV, not the actual market view.

In summary, the Implied Volatility Range is a powerful tool that translates implied volatility inputs into a clear and practical estimate of the market’s expectations for future prices. It allows traders to visualize the probability of price ranges while also highlighting directional bias, a dimension often difficult to interpret from traditional implied volatility charts. It should be emphasized, however, that this tool reflects only the market’s expectations at a specific point in time, which may change as new information and trading activity reshape implied volatility.