How Does Implied Volatility Affect the Premium of an Option?

Implied volatility (IV) is a measure of the market's expectation of future price swings in the underlying asset. It is a key input in option pricing models, such as Black-Scholes.

A higher implied volatility indicates that the market anticipates larger price movements, increasing the probability that the option will finish in-the-money. Therefore, a rise in implied volatility directly leads to a higher option premium, all else being equal.