This is achieved by using successive estimates of volatility until a volatility is found that provides the same price as that in the market. In the markets traders use handheld calculators with the formula programmed in, so they can view the figure for implied volatility whenever they want to. The forecast volatility is derived by means of an estimating technique, usually using a time series methodology, that aims to predict what volatility will be over the option period. Participants use both historic and implied to build up a picture of trends in the volatility, whether it is expensive or cheap. The assumption behind using historic volatility is that this will continue in the future, however, volatility can be very changeable in the short term.
Implied volatility gives an estimate of the market's expectations over the time remaining.
The other four factors in the option price are observable, so what people are buying or selling is volatility itself, since there is agreement over the other inputs. Attitudes to the current implied volatility will determine whether to buy or sell options. Gamma is also known as convexity. Depending on the curvature of the option price relative to the underlying price, the rate of change in the delta will be different. This is shown in the following diagram.