From SKYbrary Wiki
Cloud iridescence is the occurrence of colors in a cloud similar to those seen in oil films on puddles, located in the general vicinity of the sun or moon. It is a fairly common phenomenon, most often observed in altocumulus, cirrocumulus, lenticular clouds and cirrus clouds. The colors are usually pastel, but can be very vivid. When occurring near the sun, the effect can be difficult to spot as it is drowned in the sun's glare. This may be overcome by blocking the sun with one's hand or hiding it behind a tree or building. Other aids are dark glasses, or observing the sky reflected in a convex mirror or in a pool of water.
The effect is similar to irisation. 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.
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 circular bright disk around the sun or moon, surrounded by one or more colored rings.