Typically, implied volatility is calculated based on black scholes modeling on options. The pricing of option under this model says that more volatile an

underlying stock/commodity behind option is, the longer the expiration date, the higher the option price.

**What is the 'Black Scholes Model'**

The Black Scholes model, also known as the Black-Scholes-Merton model, is a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes the price of heavily traded assets follows a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.

**Limitations**

As stated previously, the Black Scholes model is only used to price European options and does not take into account that American options could be exercised before the expiration date. Moreover, the model assumes dividends and risk-free rates are constant, but this may not be true in reality. The model also assumes volatility remains constant over the option's life, which is not the case because volatility fluctuates with the level of supply and demand.