It illustrates that both models produce similar estimates of an option's value. The three-cent difference illustrates that the valuation models, while not identical, give very similar results. Therefore, the choice of valuation models does not materially affect the estimate of an option's value. Most of the variables included in option-pricing models are known at the time the options are issued. However, two of the variables, volatility and dividend yield, require estimates of the future.
Volatility is a measure of the propensity of a stock price to undergo large changes.
Some stocks experience wide swings, while others trade in a fairly narrow range. A stock's volatility is measured by the standard deviation of its return. The larger the standard deviation, the greater the range of likely prices. Although each stock is different, some generalizations about volatility can be made. First, volatility can change over time, but the changes tend to be temporary.