If the market expects a stock to be more volatile in the future, then the options for that stock will become more expensive today. In other words, an option's price "implies" the upcoming volatility of the underlying stock.
The more that a stock price fluctuates (i.e., the more volatile it is), the more likely it is that a given option on that stock goes in-the-money. This is why the expectation of higher volatility makes option prices more expensive. Likewise, when forthcoming volatility is expected to be low, option prices will deflate to reflect that outlook.
Looking at the above figure, you can see that the two option prices are different, even though the stock price is the same. The difference is due to the market's expectation of volatility for the underlying stock. In the left bar, the market's expectation is for lower upcoming volatility. The right bar reflects a higher expected degree of volatility. The amount of time value in each bar is indicative of the market's expectation for volatility.
Implied volatility is an attriube unique to options. It is very important to consider implied volatility in all of your trading decisions. ChartBender's iBoom application is an easy and powerful tool for helping you to consider implied volatility.
