Implied Volatility Formula

Implied volatility is a calculation that uses an option’s Vega (its sensitivity to change in volatility) to derive an estimate of volatility.

Formula:

Where:

p = option price

xi = volatility

yi = option’s theoretical value at volatility xi

vi = option’s Vega at theoretical value yi

= degree of accuracy

The following figure illustrates the iterative process used to derive an option’s implied volatility.