Historical Volatility
Historical volatility measures how much a stock actually moved in the past. Learn how it differs from implied volatility and why comparing the two reveals cheap or pricey options.
Historical volatility measures how much a stock's price actually bounced around in the past, usually over the last 20 or 30 trading days. It is a fact, not a forecast. It looks backward at what already happened.
That one word, backward, is the whole distinction from its famous cousin, implied volatility. Let me make the difference stick.
The Rear-View Mirror
Historical volatility is the rear-view mirror. It shows you the road you have already driven, how bumpy or smooth the ride has been. Implied volatility is the windshield: it shows the road ahead, the moves the market expects next.
Both are useful, and both describe the same car. One is measured from real, recorded price moves. The other is the crowd's guess about the future. A careful driver checks both.
Why Compare the Two
On its own, historical volatility is just a description. Its real power shows up when you hold it next to implied volatility, because the gap between them is a signal.
Implied is much higher than historical. The market expects far bigger moves ahead than the stock has actually been making. Options are pricey relative to reality, which often favors sellers. This is common right before earnings.
Implied is lower than historical. The market expects a calmer future than the stock's recent behavior. Options may be cheap relative to how much this stock really moves, which can favor buyers.
The stock has been swinging 2% a day for a month (historical), but options are priced as if it will swing 5% a day (implied)? That gap is the trade to think about.
- Historical volatility measures how much a stock actually moved in the past.
- It is a backward-looking fact, the rear-view mirror.
- Implied volatility is the forward-looking forecast, the windshield.
- The gap between them hints at whether options are cheap or expensive.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What does historical volatility measure?
Historical volatility is measured from real, recorded price moves. It is the rear-view mirror.
Which one is the "windshield," looking ahead?
Implied volatility is the forecast for future moves, so it is the windshield. Historical is the mirror.
Implied volatility is much higher than historical. What might that suggest?
When implied sits well above historical, the market is pricing bigger moves than the stock has made, so options look rich, which often favors sellers.
Bottom Line
Historical volatility is the honest record of how much a stock has moved. By itself it just describes the past. But hold it up against implied volatility and the two together tell you whether today's options are priced richly or cheaply compared to how the stock actually behaves.
Check the mirror and the windshield. The gap between them is where the interesting decisions live.
Keep going: the forward-looking side of the story is implied volatility, and its sharpest move is IV crush.