Define Implied Volatility (IV) and Its Source in Option Pricing

Implied Volatility (IV) is a forward-looking measure representing the market's expectation of how much the underlying asset's price will fluctuate over a specific period. It is not observed directly but is derived by inputting the current market price of an option into an option pricing model, like Black-Scholes, and solving for the volatility variable.

IV is a crucial factor in determining an option's premium.