How Does IV Relate to the Black-Scholes Model for Option Pricing?
The Black-Scholes model requires five inputs to calculate an option's theoretical price: strike price, current underlying price, time to expiration, risk-free interest rate, and volatility. Since the market price of an option is known, IV is not an input but is derived from the market price by reverse-engineering the Black-Scholes model.
It is the volatility level that makes the model price equal the market price.
