That might be a simple question to you. But I am a little confused. Is it determined by the options price in the markets or the historical volatility of the asset price? Thanks

Options prices.

Implied by options prices. Basically you keep choosing implied vols and plugging them into the black-scholes option pricing formula, with all other parameters taken from the market, until yuor options price produced by black-scholes equals your option price observed in the market.

Thanks, I am clear now

QuoteOriginally posted by: willsmithImplied by options prices. Basically you keep choosing implied vols and plugging them into the black-scholes option pricing formula, with all other parameters taken from the market, until yuor options price produced by black-scholes equals your option price observed in the market.What IV the market uses to get its option price?

The implied volatility is the wrong number to put in the wrong formula to obtain the right price.

Since the implied volatility is from the wrong formula (BS formula fails in many situations), why people prefer to use implied volatility than the real pricesQuoteOriginally posted by: rmaxThe implied volatility is the wrong number to put in the wrong formula to obtain the right price.

QuoteOriginally posted by: fmfreshmanSince the implied volatility is from the wrong formula (BS formula fails in many situations), why people prefer to use implied volatility than the real pricesQuoteOriginally posted by: rmaxThe implied volatility is the wrong number to put in the wrong formula to obtain the right price.It means more.

Quotewhy people prefer to use implied volatility than the real pricesthe price depends on many things including S (underlying price), T (maturity), E (strike), R (interest rate). To remove the effect of all these (even approximately and under certain assumptions) and be left with IV makes for a more informative more "pure" measure of option value, as Rmax said.

QuoteOriginally posted by: acastaldoQuotewhy people prefer to use implied volatility than the real pricesthe price depends on many things including S (underlying price), T (maturity), E (strike), R (interest rate). To remove the effect of all these (even approximately and under certain assumptions) and be left with IV makes for a more informative more "pure" measure of option value, as Rmax said.That's all true in the context of Black-Scholes. But ultimately the reason people prefer to use implied volatility is because they have no clue what is really going on and can't agree on a better framework to discuss pricing fluctuations and distributions.

Option price is a number that by itself is meaningless for most of the trading decisions. Implied vol, as an estimate of future volatility, could be compared to historical volatility of the asset or to another theoretical model vol prediction. It could be compared to implied vols of the same asset with different strikes and maturities, to implied vol of other assets and their relative dynamics. In other words, implied vol could be used for various rich cheap considerations, whereas option price could be used for almost none.

QuoteOriginally posted by: fmfreshmanThat might be a simple question to you. But I am a little confused. Is it determined by the options price in the markets or the historical volatility of the asset price? Thankssee p130 of PWOQF. this is nicely explains there.and that helps a lot to put the understanding of IV (okay, this is just theory....) into practice. see, Black-76 Model Implied Volatility Calculator in Excel and Implied volatility of options with VBA-Excel