Implied volatility is a measure of what the options markets think volatility will be over a given period of time (until the option’s expiration), while historical volatility (also known as realized volatility) is a recording of how the underlying actually moved over a specified past period.

Volatility measures the rate at which a security moves up and down. If a security is moving up and down quickly, volatility will be high. Conversely, if a security is moving up or down slowly, volatility will be low.

Implied volatility (IV) shows how much movement the market is expecting in the future.

Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other.

High implied volatility could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.

Generally, option traders look to buy options when implied volatility is low since premiums are lower, in hopes of seeing the underlying stock move in a favorable direction along with an increase in volatility which will make premiums increase.

And traders look to write options when implied volatility is high as option premiums tend to be higher, in hopes of seeing the underlying stock move in a favorable direction to his/her position along with a decrease in volatility which would make premiums decrease.

This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.

The general idea that options with high IVs are expensive and options with low IVs are cheap.

References:

1. https://www.nasdaq.com/articles/is-the-options-market-predicting-a-spike-in-invesco-mortgage-capital-ivr-stock-2021-06-11
2. https://www.nasdaq.com/articles/what-does-implied-volatility-really-mean-2020-10-29