How Is Implied Volatility (IV) Calculated from the Market Price of an Option? ▴ Learn

How Is Implied Volatility (IV) Calculated from the Market Price of an Option?

Implied Volatility (IV) is not directly observed but is derived by using an option pricing model, such as Black-Scholes, and iteratively solving for the volatility input that makes the model's theoretical price equal to the option's current market price. This process is known as "inverting the model." Since all other inputs (strike, time, spot price, risk-free rate) are known, IV becomes the variable that balances the equation.

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