Implied volatility
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The volatility that, when input to Black-Scholes, reproduces the observed option market price.
Implied volatility in plain English
An option is a contract that lets you buy or sell something later at a price locked in today, and "volatility" just means how wildly that thing's price tends to jump around. The catch: nobody knows the future volatility, yet it's the one ingredient the famous Black-Scholes pricing formula needs. So traders flip the problem around: they take the price the option is actually selling for in the market, and work backwards to ask, "What volatility would the formula have to assume to spit out that exact price?" That back-solved number is the implied volatility. It's basically the market's live guess about how bumpy the ride ahead will be, read straight off option prices, the same way you could infer how hot an oven is from how fast a cake browns.
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