Implied volatility is a measure of the market's expectation of the future volatility of the underlying asset, based on the prices of options contracts. In the context of a call option, implied volatility refers to the level of expected volatility that is implied by the market price of the option.
A call option gives the holder the right, but not the obligation, to buy the underlying asset at a predetermined price (the strike price) on or before a specific date (the expiration date). The value of a call option is influenced by several factors, including the price of the underlying asset, the strike price, the time until expiration, and the implied volatility.
Implied volatility represents the market's perception of the likelihood of significant price movements in the underlying asset over the life of the option. A higher implied volatility implies a greater expected range of price movement and therefore a higher likelihood of the option reaching the strike price before expiration. As a result, a higher implied volatility generally leads to a higher price for the call option. Conversely, a lower implied volatility implies a lower expected range of price movement and therefore a lower likelihood of the option reaching the strike price, resulting in a lower price for the option.
