# Implied Volatility Calculation

The implied volatility represents the volatility of the price yields of the asset underlying the option, calculated using iterations. All other parameters that characterize an option are known: the price of the underlying asset, the strike price, the time to expiry, the risk-free rate (for the considered expiry), the dividend (if any) and the option premium observed on the market.

For investors, the implied volatility is a useful indicator as it corresponds to the volatility anticipated by market participants for the life of the option and reflects in the option premium. Note that the higher the implied volatility, the higher the option premium and vice versa. Thus, an investor could compare the implied volatility with the historical volatility of the underlying asset and make his own opinion of the upcoming volatility in order to help him implement an options strategy that he finds optimal.

For simplification purposes, the calculation by iterations is based on the Black & Scholes model and on the Newton-Raphson algorithm. The Black & Scholes model presents many limitations, the most important being that it evaluates European-style options only. We have applied this model to American-style options, which premiums are often higher than the premiums of European options. The implied volatility calculated for American options – the majority of listed options on the Montréal Exchange – will then be distorted. The volatility calculated generally overstates the implied volatility. Thus, if the volatility calculated is of 20%, the implied volatility of the option will be at the most 20%.

The implied volatility can also be obtained from the Implied Volatility Calculator integrated in the Options Calculator available in the Trading Tools section.

Disclaimer: Implied volatility figures are supplied for information only and represent an approximation of the real implied volatility. These values are provided by way of illustration and mustnot be used under any circumstances as a base to implement any option strategies nor to invest in options and shares underlying the options.