Define Implied Volatility (IV) and Its Relationship to Option Premium.
Implied Volatility (IV) is the market's forecast of a likely movement in an asset's price, derived by working backward from the current option premium using an options pricing model like Black-Scholes. It is not historical volatility but a forward-looking measure of risk.
A higher IV leads directly to a higher option premium because the probability of the option expiring in-the-money is perceived as greater.
Glossar
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.