Chapter 29. Implied Volatility and the Black-Scholes Formula[*]

[*] Chapters with more advanced content are marked with an asterisk and can be passed over by beginners during the first reading of this book.

The concept of implied volatility (IV) is important in evaluating an options trade. Experienced options traders have learned to appreciate that the implied volatility of an option suggests whether the option is overpriced or underpriced. To fully understand the meaning of implied volatility, you need some basic knowledge of the theory of options pricing, as expressed in the famous Black-Scholes formula.

The goal of this chapter is to provide some background and insight into the Black-Scholes formula and how IV is determined from that formula. ...

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