Implied volatility is the volatility input that makes an option-pricing model consistent with an observed option price under stated assumptions. It is inferred from the premium rather than measured directly from past returns, and is commonly quoted as an annualized percentage.
A price of uncertainty
The calculation combines the option price with inputs such as the underlying price, strike, remaining time and interest or carrying assumptions. The resulting IV summarizes uncertainty priced into that particular option. It is not a guaranteed forecast of realized volatility, a directional prediction or a probability of profit.
Holding other valuation inputs fixed, higher IV generally raises the value of ordinary calls and puts. Lower IV can reduce a purchased option's value even when the underlying moves in the anticipated direction. Intrinsic value itself still depends on the underlying and strike, not IV.
Compare like with like
Options on the same asset can have different IVs across strikes and expiries. Differences across strikes form a volatility skew or smile; differences across maturities form a term structure. One number therefore does not describe the entire options market.
The chosen pricing model and quote also matter. Bid, ask and midpoint prices can imply different values, especially in an illiquid market. Comparing IV with historical volatility requires matching horizons and calculation conventions, while recognizing that option prices also reflect hedging demand and compensation for bearing risk.