Explain How IV Is Derived from the Market Price of an Option ▴ Learn

Explain How IV Is Derived from the Market Price of an Option.

Implied Volatility (IV) is derived by working backward from the current market price (premium) of an option using an option pricing model like Black-Scholes. The model takes the premium, strike price, underlying price, time to expiration, and interest rate as inputs and solves for the volatility that makes the theoretical price equal to the market price.

It is the only unknown variable that is solved for.

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