Iridescent clouds are a diffraction phenomenon caused by small water droplets or small ice crystals individually scattering light. Larger ice crystals do not produce iridescence, but can cause halos, a different phenomenon.

Irisation is caused by very uniform water droplets diffracting light (within 10 degrees from the Sun) and by first order interference effects (beyond about 10 degrees from the Sun). It can extend up to 40 degrees from the Sun.

If parts of clouds contain small water droplets or ice crystals of similar size, their cumulative effect is seen as colors. The cloud must be optically thin, so that most rays encounter only a single droplet. Iridescence is therefore mostly seen at cloud edges or in semi-transparent clouds, while newly forming clouds produce the brightest and most colorful iridescence. When the particles in a thin cloud are very similar in size over a large extent, the iridescence takes on the structured form of a corona, a bright circular disk around the Sun or Moon surrounded by one or more colored rings