What Is the Role of ‘Volatility’ in the Black-Scholes-Merton Model?

Volatility is a critical input in the Black-Scholes-Merton (BSM) model, representing the expected magnitude of an asset's price fluctuations over a given period. Higher volatility increases the chance of the option expiring In-The-Money, thus increasing the option's premium (Time Value).

BSM uses annualized standard deviation of returns as its volatility measure.