Historical Volatility

The actual realized volatility of an underlying asset over a past period, calculated from historical price data — often compared to implied volatility to assess whether options are cheap or expensive.

Historical volatility (HV), also called realized volatility, is calculated from actual past price movements. It is the standard deviation of the asset's daily returns over a specified lookback period (typically 10, 20, 30, or 60 trading days), annualized. Unlike implied volatility, which is forward-looking and derived from option prices, HV measures what the asset actually did in the past.

The relationship between HV and IV is fundamental to options trading. When IV is significantly higher than HV, options appear expensive relative to actual past movement — a potential signal to sell options and collect the inflated premium. When IV is significantly lower than HV, options appear cheap — potentially worth buying if you expect future volatility to return to historical levels.

HV is not a fixed number — it changes as new price data replaces old data in the lookback window. A stock that has been calm for months might show low 30-day HV, but if it has a volatile earnings report, the 30-day HV will spike and remain elevated for a month. Comparing IV to HV on a consistent lookback basis (e.g., comparing 30-day IV to 30-day HV) provides the most apples-to-apples comparison for evaluating options pricing.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.