What is Historical Volatility (HV)? A Simple Guide

Historical volatility (HV) measures how much an underlying actually moved over a past period. It is calculated from real price data, unlike implied volatility, which is forward-looking. HV describes the size of past price swings.

If implied volatility is the market's guess about the future, historical volatility is the record of the past. It tells you how much a stock has actually moved.

Comparing the two helps you judge whether options are cheap or expensive. The sections below explain it step by step, without the jargon. You can study volatility on Stockk.

Key Takeaways

• HV measures how much an asset actually moved in the past.
• It is calculated from real price data.
• It is backward-looking, unlike forward-looking IV.
• Comparing HV with IV shows if options are cheap or dear.
• HV is a baseline, not a forecast.

How is historical volatility used?

HV provides a baseline of an underlying's normal movement, which traders compare against implied volatility. When IV sits well above HV, options may be relatively expensive. When IV is below HV, they may be relatively cheap.

Consider a case where a stock swung widely over the last month. Its historical volatility would be high, reflecting those past moves. Comparing this with the current IV tells a trader whether options look cheap or expensive relative to recent behaviour.

How does HV differ from IV?

Comparing HV and IV in practice

The gap between HV and IV is itself a signal that volatility traders watch. If IV is much higher than HV, the market expects bigger moves than the stock has been making, which can mean options are overpriced. If IV is below HV, options may be a relative bargain.

• IV above HV: options look expensive, may favour selling
• IV below HV: options look cheap, may favour buying
• IV near HV: options fairly priced versus recent behaviour

Why HV is a baseline, not a forecast

It is important to remember that HV only describes the past. A stock that was calm for a month can suddenly become volatile, and vice versa. HV does not predict this; it simply tells you what has been happening. That is why traders use it alongside IV, which captures the market's forward expectations.

You will find futures and options and the full options suite on Stockk. Open your free demat account to get started, and dip into the Knowledge Center for related explainers.

Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.

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