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.