What is Historical Volatility (HV)?
The backward-looking reality check that tells you how a stock has actually moved—and whether the market's future expectations make sense.
Quick Summary
Historical Volatility (HV) measures how much a stock's price has actually moved over a specific past period. Unlike Implied Volatility (IV) which predicts future movement, HV is based on factual price data. Comparing HV to IV reveals whether option premiums are overpriced or underpriced relative to the stock's typical behavior.
In our previous post, we discussed Implied Volatility (IV)—the market's forward-looking "fear gauge" that predicts how much a stock might move.
But predictions are often wrong. Sometimes the market expects a hurricane, but we only get a light drizzle. Other times, the market expects calm seas, and a storm hits out of nowhere.
To judge whether the market's predictions are accurate, we need a baseline. We need to know how the stock has actually moved in the past.
This metric is called Historical Volatility (HV).
The Definition: What is Historical Volatility?
Definition
Historical Volatility (HV), sometimes called Statistical Volatility or Realized Volatility, measures the speed and magnitude of price changes that a stock has actually experienced over a specific period in the past.
It is a backward-looking metric. It deals in cold, hard facts—not predictions or expectations.
High HV
The stock has been swinging wildly recently (e.g., moving 5% every day last month)
Low HV
The stock has been trading in a tight range recently (e.g., moving 0.2% a day last month)
Technically speaking, HV is the annualized standard deviation of past stock price movements. It answers the question: "How volatile has this stock really been?"
The Analogy: Rearview Mirror vs. Windshield
The easiest way to understand the difference between Historical Volatility and Implied Volatility is to imagine driving a car.
Historical Volatility
The Rearview Mirror
Shows exactly where you've been and how bumpy the road was. Factual data about the past.
Implied Volatility
The Windshield
Shows the road ahead. The driver's expectation of how bumpy the next stretch will be.
Just as a driver checks both their rearview mirror and windshield to make good decisions, traders compare both HV and IV to understand the full picture.
HV vs. IV: Why the Difference Matters
The relationship between what happened (HV) and what the market expects to happen (IV) is where opportunity lies for traders.
| Metric | Historical Volatility (HV) | Implied Volatility (IV) |
|---|---|---|
| Direction | Backward-looking | Forward-looking |
| Based on | Actual price data | Option prices (market expectation) |
| Question it answers | "How much did it move?" | "How much will it move?" |
| Nature | Factual, objective | Predictive, subjective |
When IV is Higher than HV
Scenario: The stock has been quiet (Low HV), but option prices are elevated (High IV).
What it means: The market expects a major event soon—earnings, FDA approval, Fed meeting, etc. Options are priced for a storm that hasn't arrived yet.
Implication: Options may be expensive relative to how the stock usually moves. If the event disappoints, IV could collapse back toward HV.
When IV is Lower than HV
Scenario: The stock has been swinging wildly (High HV), but option prices are relatively cheap (Low IV).
What it means: The market thinks the storm is over and things will calm down—but the stock is still moving aggressively.
Implication: Options may be underpriced if you believe the wild swings will continue.
How is Historical Volatility Calculated?
You don't need to calculate HV yourself—every charting platform does it automatically. But understanding the concept helps you interpret the numbers.
HV is typically calculated using the "Close-to-Close" method over a set timeframe:
The Calculation Process (Simplified)
- Take the daily percentage change in price for each day in the period
- Calculate the standard deviation of those daily changes
- Annualize the result (multiply by √252, the number of trading days) so it can be compared with IV
HV-30 is the most common standard because it aligns well with typical option expiration cycles and provides a reasonable balance between recent data and noise reduction.
A Real-World Example
Let's see how HV and IV work together in practice.
Company XYZ Analysis
IV-HV Gap
+30%IV is 3x higher than recent realized volatility
Analysis: Over the last month, this stock has been very stable (15% HV). However, option premiums are pricing in massive 45% volatility for the future.
Why the gap? Perhaps an earnings report is due next week. The market is ignoring the quiet past and pricing in a potentially chaotic future.
The Question: Is the market right to expect 3x more volatility? If the earnings report turns out to be uneventful, IV will likely collapse back toward HV levels—and anyone who bought options at inflated IV could lose money even if the stock doesn't move against them.
Frequently Asked Questions
Summary
Historical Volatility is your reality check. Without it, you have no way of knowing if an Implied Volatility of 50% is "high" or "normal" for that specific stock.
IV tells you how expensive the options are right now.
HV tells you if that price is justified by recent behavior.
By comparing these two numbers, you gain insight into whether the market's expectations are reasonable or potentially out of sync with reality.
