An option with two months remaining decays at twice the speed of a four month option etc. The volatility part of the pricing model is a measure of the range the underlying security is expected to fluctuate over a given period of time. The measurement of volatility is the standard deviation of the daily price changes in the security. The more volatile the underlying security, the greater the price of the option. There are two different kinds of volatility.
Historical volatility estimates volatility based on past prices.
Implied volatility starts with the option price as a given and works backward to ascertain the theoretical value of volatility equal to the market price minus any intrinsic value. Option Pricing Models There are many different option pricing models in practice. However, the original breakthrough was in the Black-Scholes model. It was a model for pricing options before options were widely traded. The original Black Scholes model worked primarily for European style options.