What Is Implied Volatility and How Does It Relate to Option Pricing?

Implied volatility (IV) is the market's expectation of how much the price of the underlying asset will fluctuate in the future. It is a critical input into option pricing models like Black-Scholes.

Higher IV leads to higher option premiums because the greater expected price movement increases the probability of the option expiring in-the-money. IV is not historical but is derived from the current option price.