What Is ‘Volatility’ and How Does It Impact the Pricing of an Option?

Volatility is the measure of how much an asset's price fluctuates over time. It is a key input in option pricing models (like Black-Scholes).

Higher volatility increases the probability that the asset's price will move significantly, making the option more likely to be 'in-the-money' at expiration. Therefore, higher volatility leads to higher option premiums.