How does an increase in implied volatility affect the price of options?

An increase in implied volatility typically leads to an increase in option prices. Implied volatility represents the market's expectation of how much the price of the underlying asset is likely to fluctuate over a given period. When implied volatility rises, it suggests that traders anticipate greater price swings, which increases uncertainty.

Since options give the holder the right, but not the obligation, to buy or sell an underlying asset at a certain price, higher volatility raises the potential for the option to be profitable. This increased potential makes options more valuable to traders, resulting in higher premiums.

In the options market, increased implied volatility broadens the range of potential outcomes for the underlying asset's price movement, benefiting both call and put options equally. Therefore, this scenario explains why rising implied volatility generally correlates with an increase in the prices of options.