What Is the Role of Implied Volatility in Option Pricing?

Implied volatility (IV) is a measure of the market's expectation of future price swings for the underlying asset. It is derived by working backward from the current market price of an option using a pricing model like Black-Scholes.

IV is a crucial input because higher expected volatility increases the probability of the option expiring in-the-money, thus increasing its premium. It is a forward-looking metric, unlike historical volatility.