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

Historical volatility (HV) 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 using a pricing model like Black-Scholes.

IV represents the market's expectation of future price volatility and is the most crucial input for options pricing, often reflecting market sentiment and risk perception.