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.
Glossar
The Black-Scholes Model
Foundation ⎊ The Black-Scholes model serves as the cornerstone for modern options pricing theory, providing a continuous-time framework for calculating the fair value of derivatives.
Binomial Option Pricing
Valuation ⎊ Binomial option pricing, within cryptocurrency markets, represents a discrete-time model for estimating the theoretical value of derivative contracts, acknowledging the inherent volatility and non-continuous trading characteristic of digital assets.