The implied volatility of an option
A) Is the volatility that would have to be plugged into a given option-pricing model to obtain the observed market price.
B) Can only be calculated using the Black-Scholes model.
C) Is the volatility implied by the underlying stock price over a given historical period.
D) Is equal to the volatility that will actually be realized over the life of the option.

Question

Quizplus · Accepted Answer

Implied volatility is the volatility that would have to be input into a given option-pricing model to obtain the observed market price. It is derived from the market price of the option and reflects the market's expectations of the stock's future volatility. It is not necessarily the same as the realized or historical volatility of the underlying stock.

The Implied Volatility of an Option