What is implied volatility and how does it relate to option price?

• A. Implied volatility is the volatility input that makes the Black-Scholes price equal to the observed market price; it represents market's expectation of future volatility.
• B. Implied volatility is the historical volatility observed in the past year.
• C. Implied volatility is the volatility input that represents the average volatility over the option's life.
• D. Implied volatility is the volatility input that makes the Black-Scholes price differ from the observed price.

Answer: (D)