How to Calculate Implied Volatility From an Option Price

Learn how to calculate implied volatility from an option price using Black-Scholes, with examples, key inputs, IV interpretation, and a free IV calculator.

When you look at an options chain, you see a market price for every contract. But that price contains more information than the premium you would pay to buy or receive to sell the option. It also reflects the market's assessment of uncertainty surrounding the underlying asset. Implied volatility , usually abbreviated as IV, is the volatility level that can be derived from an option's market price using an option pricing model. That makes IV one of the most useful measurements for understanding how expensive or inexpensive an option may be relative to its own history or to other contracts. The difficult part is that you cannot normally take an option premium and plug it into a simple rearranged formula to get IV. Instead, you start with the observed option price and work backward through a pricing model until it produces an approximately matching price. Cboe's published methodology describes this process as equating the Black-Scholes model price with the observed option price and solving for volatility. That sounds complicated, but the basic idea is surprisingly straightforward. Option price → pricing model → implied volatility . Once you understand that relationship, an implied volatility calculator becomes much easier to use and, more importantly, much easier to interpret. If you want to avoid doing the numerical calculation manually, you can use the SecurePutCalls Implied Volatility Calculator to work through the calculation with the relevant option inputs. What Is Implied Volatility? Implied volatility is the volatility figure that is implied by an option's present market price. To put it simply, think of an option pricing model as a machine. You put into the machine the stock price, the strike price, the expiration date, the interest rate, the dividend assumptions, and the volatility. The machine then gives you a theoretical value for the option. In normal pricing, you have the volatility assumption and work out the option price. With implied volatility, you reverse the procedure: you start with the market price and find the volatility figure that causes the model to match that price. That is the reason the term "implied" is important. IV is not observed in the same manner as a stock's current price; instead, it is deduced from the prices at which traders are now buying options. When the premium of an option increases while all the other pricing factors stay the same, the volatility needed to account for that higher premium will usually increase as well. On the other hand, a lower option premium generally means a lower implied volatility, all other things being equal. Cboe's options tools do likewise by using option-pricing calculations to illustrate how the various variables affect theoretical prices and the Greeks. IV vs. Realized Volatility It is essential not to mix up implied volatility in options with historical or realised volatility. Historical volatility is a measure of how much the underlying asset actually moved during a previous p