What Role Does Implied Volatility Play in Options Pricing?

Implied volatility (IV) is the market's expectation of the underlying asset's price volatility over the life of the option contract. It is the only input to the Black-Scholes model that is not directly observable.

Higher IV means the market expects larger price swings, increasing the probability of the option expiring in-the-money, thus increasing the option's extrinsic (time) value and its overall premium. IV is crucial for traders as it reflects market sentiment and risk perception.