Understanding Implied Volatility in Options

Very Easy Option Valuation Implied Volatility

Implied volatility is a crucial concept in option pricing, indicating the market's expectation of the future volatility of the underlying asset. It plays a significant role in the valuation of options, influencing their prices directly. Understanding implied volatility can help investors assess whether options are underpriced or overpriced relative to market expectations.

Which of the following statements correctly describes implied volatility?

Implied volatility is the actual historical volatility of the underlying asset.

Implied volatility is a measure of expected future volatility derived from an option's market price.

Implied volatility is constant and does not change with market conditions.

Hint

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