A method that is used to calculate the value of an at-the-money call option (under the assumption of zero interest rates) using the following formula:

C = σ S (T/2П)^1/2 = 0.4 x σ x S x T^1/2

where:

C   is the call price

σ   is the standard deviation of the underlying’s price (it is the implied volatility)

S   is the underlying’s current price

T    is the option’s life

П =3.14159

It follows, by rearranging the formula, that the implied volatility of the underlying is given by:

Vol_ATM = (2П/T)^1/2 x C/S₀ = [2.5 x C]/[S₀ (T)^1/2]

For example, suppose a 6-month call option is trading at USD5 while the underlying is currently at USD100. The implied volatility of this option would be:

Vol_ATM = (2П/0.5)^1/2 x 5/100 = 12.53%