What is implied volatility?

Implied volatility is the estimated volatility of a security's price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. 

In addition to known factors such as market price, interest rate, expiration date, and strike price, implied volatility is used in calculating an option's premium. It can be derived from a model such as the Black Scholes Model.

Implied volatility is important in pricing of options. If the underlying security on which the option is based is highly volatile the price of the option increases. Consider the following hypothetical example. If the stock price of Microsoft is hovering between $70 to $130 and that of IBM is fluctuating between $90 to $110, then the price of option with strike of $100 would be higher for Microsoft than for IBM. The reason is simple, since there is a higher probability of Microsoft crossing the $100 mark as compared to IBM. It is important to investors as they need to deem fit that the profit on the option should be higher than it's price. Otherwise they may lose significant amount of money.
The practical use to investors depends on the type of investment:

1. Investors looking to hedge risk for their cash portfolio might want to buy options when IV is low to avoid paying huge premium and benefit when volatility in the market kicks in to make their option contracts worth more than what they were at cost. 

Eg. During Indian elections, the Adani Enterprise at the money Puts and Calls were being traded at 40k at the start of month while any other month the same would have been around 20k. The sheer bullishness and uncertainties related to Elections outcome made the IV shoot up causing the option premiums to go up. Somone buying these calls or puts before the volatility kicked in would have easily profited, though people who are late into the game, it means they need more money to trade options.

2. Option writers who want to gain by insuring investors against any market fluctuations would want to write these contracts when there is high IV to collect more premium for the risk he/she is taking and hold it long enough for the time decay to work its magic. 
Eg. The option writer writing those options now can collect 40k premium instead of 20k and hope to make a profit from time decay or movement in his favour. The only problem is that due to high volatility, the margin requirements also go up very high from average 70-80k to 200-210k.

3. Option traders should never buy puts or calls when IV is too high since more or less IV will drop fast enough to make your options worth less in no time. It might do good to prefer trading cash or spot market since margin requirements are same and there is no time decay or enough volatility to trade more quantities.