How Is Volatility Measured for the Black-Scholes Model? ⎊ Path

How Is Volatility Measured for the Black-Scholes Model?

Volatility for the Black-Scholes model is typically measured using 'historical volatility' or 'implied volatility'. Historical volatility is the annualized standard deviation of the underlying asset's returns over a specified past period.

Implied volatility (IV) is the volatility value that, when plugged into the Black-Scholes formula, makes the model's calculated price equal to the option's current market price. IV is the more forward-looking and commonly used measure in practice.

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How Is Implied Volatility Derived from the Black-Scholes Model?

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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.

Annualized Standard Deviation

Calculation ⎊ The Annualized Standard Deviation converts a short-term volatility measure, such as daily or weekly standard deviation of returns, into a yearly figure.