What Is the Concept of “Implied Volatility” and How Is It Derived from Market Prices?

Implied volatility (IV) is the market's expectation of the underlying asset's future volatility over the life of the option. It is not an input to the Black-Scholes model but is instead derived by taking the actual market price of an option and "backing out" the volatility value that makes the model's theoretical price equal to the market price.

IV is a forward-looking metric, often used as a gauge of market sentiment and perceived risk.