How Does the Black-Scholes Model Use Implied Volatility to Price Options?

The Black-Scholes model is a mathematical formula that estimates the theoretical price of European-style options. It takes five main inputs: the underlying asset price, the strike price, the time to expiration, the risk-free interest rate, and volatility.

Since all other inputs are observable, the model is often used in reverse: the current market price of the option is used to calculate the implied volatility (IV), which is the market's forecast of future price swings.