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.