**
**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.