How Is the IV for a Specific Option Contract Calculated?

Implied volatility is not directly observed but is calculated by reverse-engineering an option pricing model, such as Black-Scholes. The current market price (mid-point of the bid-offer spread), the underlying asset's price, the strike price, time to expiration, and the risk-free rate are all plugged into the model.

The volatility variable is then iteratively adjusted until the model's theoretical price matches the observed market price, yielding the implied volatility.