How Does Implied Volatility (IV) Affect the Size of the Option Premium?

Implied volatility (IV) is a measure of the market's expectation of future price swings for the underlying asset. It is the most significant factor in determining the extrinsic (time) value of an option.

Higher IV means the market expects larger price movements, increasing the probability of the option ending up in-the-money. Therefore, a higher IV directly results in a higher option premium, all else being equal.