How Does ‘Implied Volatility’ Differ from ‘Historical Volatility’ in Options Pricing?

Historical volatility is a backward-looking measure, calculated from the past price movements of the underlying asset. Implied volatility (IV) is a forward-looking measure, derived from the current market price of the option itself.

IV represents the market's expectation of future price volatility. Options are priced using IV, not historical volatility, as it reflects the current supply and demand for the option.