Understanding Implied Volatility

Very Easy Option Valuation Implied Volatility

Consider a call option on a stock that has a strike price of $50, expiring in 3 months. The current price of the stock is $55, and the market price of the call option is $7. Traders often look to implied volatility (IV) as an indicator of market expectations for future price fluctuations. In this context, which of the following statements about implied volatility is true?

Implied volatility represents the market's forecast of a stock's potential price movement based on the option's current market price.

Implied volatility is usually higher for options that are deeply in-the-money.

Implied volatility is solely determined by the underlying asset's historical volatility.

Hint

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