Implied volatility is a measure of the expected future volatility of the underlying asset, as implied by the current options prices in the market. It is an important factor in determining the price of options contracts, as higher implied volatility generally results in higher options premiums, and vice versa.

For example, let’s say that Company XYZ is expected to release its quarterly earnings report next week. If there is a lot of uncertainty about how the market will react to the earnings report, the implied volatility of Company XYZ’s stock options will increase, as traders and investors may be willing to pay a higher premium to protect themselves from potential price swings. Conversely, if there is little expected volatility around the earnings report, the implied volatility will decrease, and options premiums will be lower. Traders can use implied volatility to make informed decisions about which options contracts to buy or sell, based on their market expectations and risk tolerance.