how do changes in implied volatility affect options prices 
regardless of whether an option is a call or put its price or premium will increase as implied volatility increases this is because an option s value is based on the likelihood that it will finish in the money itm since volatility measures the extent of price movements the more volatility there is the larger future price movements ought to be and therefore the more likely an option will finish itm the relationship between an option s extrinsic value and implied volatility is therefore key to understanding option pricing extrinsic value also known as time value is the portion of an option s price that is not intrinsic value i e the difference between the underlying asset s price and the option s strike price which represents the amount an option is in the money extrinsic value is directly influenced by implied volatility higher iv leads to higher extrinsic value while lower iv results in lower extrinsic value at the same time an option s intrinsic value is not related to iv only to its moneyness will all options in a series have the same implied volatility no not necessarily downside put options tend to be more in demand by investors as hedges against losses as a result these options are often bid higher in the market than a comparable upside call unless the stock is a takeover target as a result there is more implied volatility in options with downside strikes than on the upside this is known as the volatility skew or smile the bottom lineimplied volatility iv reflects investors perceptions of uncertainty or risk associated with the future movements of the underlying asset this differs from historical volatility which is observed by looking at past price action because it cannot be directly observed iv must be backed out of options prices using pricing models high implied volatility generally indicates greater expected price swings low implied volatility suggests the market anticipates relatively stable prices traders and investors use implied volatility to assess market sentiment gauge the potential risks and rewards of trading options and better investment decisions 