Implied Volatility
The volatility input consistent with an observed option price under a model.
#An inverted price
Implied volatility is obtained by solving a pricing model for the volatility input that reproduces an observed option price. It is model-dependent and forward-looking only in the limited sense that market prices embed expectations and risk premia.
#Not a direct forecast
- Different strikes and expiries can carry different implied volatilities.
- Liquidity and supply-demand imbalances affect observed prices.
- Realized volatility can be higher or lower.
- Jumps and corporate events can dominate smooth-model assumptions.