Financial Glossary
Historical Volatility
Backward-looking volatility: how much an asset has actually moved recently.
What is Historical Volatility?
Historical volatility (HV), also called realized volatility, measures how much an asset's price has actually fluctuated over a past period (typically 30, 60, or 252 days). It's calculated as the standard deviation of daily price returns, expressed as an annualized percentage. Unlike implied volatility (which forecasts future movement), HV is objective and backward-looking—it's what actually happened, not what the market expects.
HV varies depending on the lookback period: a 30-day HV captures recent volatility; a 252-day HV (one trading year) captures longer-term behavior. A stock might have 15% HV over 30 days but 25% HV over the past year, indicating it's been calmer recently than historically.
HV vs. IV: The Comparison
Comparing historical volatility to implied volatility reveals market sentiment. If IV is much higher than HV, options are relatively expensive, suggesting high expected future movement. If IV is much lower than HV, options are cheaper, suggesting the market expects calmer times ahead. Sophisticated traders use this comparison to identify mispricings: buying when IV is low relative to HV, selling when IV is high.
Mean reversion is key: HV and IV tend to converge over time. After a calm period (low HV), market participants often overestimate future volatility (high IV), creating an opportunity to sell expensive options. After turbulent periods (high HV), IV often overstates future moves, creating a chance to buy cheap options.
Disclaimer: Historical volatility does not predict future volatility. Past price movements are not guarantees of future results. Before making options trading decisions, consult a qualified financial advisor. Options involve substantial risk.