Unfortunately, future volatility is only known when it has become historic volatility. Consequently, the volatility numbers used in option pricing formulas are only estimates of future volatility. This might be a shock to those who place their faith in theoretical values, because it raises a question about those values. Theoretical values are only estimates, and as with any estimate, they must be interpreted carefully. Expected volatility is a trader's forecast of volatility used in an option pricing formula to estimate the theoretical value of an option.
Many option traders study market conditions and historical price action to forecast volatility.
Since forecasts vary, there is no specific number that everyone can agree on for expected volatility. Theoretical value of an option is a statistical concept, and traders should focus on relative value, not absolute value. Two traders could differ in their opinion of the relative value of the same option if they have different market forecasts and trading styles. VIX, introduced by CBOE in 1993, measures the volatility of the U.S. equity market. This index is calculated by taking a weighted average of the implied volatilities of eight OEX calls and puts.