Define ‘Implied Volatility’ in the Context of Options Pricing

Implied Volatility (IV) is the market's expectation of how much the price of the underlying asset will fluctuate over a specific period, derived by working backward from the current market price of an option. It is a key input into options pricing models like Black-Scholes.

Unlike historical volatility, IV is forward-looking and represents the uncertainty or risk perceived by the market, directly influencing the option's premium.