Historical Volatility

Historical volatility (HV) measures how much a stock's price has actually moved over a specific past period, expressed as an annualized percentage. It is calculated from the standard deviation of the stock's daily returns. HV is a backward-looking measure — it tells you what has happened, not what will happen.

Why It Matters

Historical volatility gives you a baseline for evaluating implied volatility. If a stock's HV is 25% but its current IV is 45%, options are priced for nearly double the movement the stock has actually shown. That disconnect is an opportunity — often for sellers who believe the market is overpricing risk.

Comparing HV to IV is one of the most fundamental analyses in options trading. When IV is significantly above HV, options are considered expensive. When IV is below HV, options are considered cheap. This comparison drives strategy selection: sell premium when IV is high relative to HV, buy premium when it is low.

How It Works

HV is calculated using these steps:

1. Collect daily closing prices for a specific period (commonly 20, 30, or 60 trading days)
2. Calculate the daily percentage returns (log returns, technically)
3. Compute the standard deviation of those returns
4. Annualize by multiplying by the square root of 252 (trading days per year)

Common HV periods:

• HV10 or HV20: Short-term realized volatility. Useful for comparing against short-dated options.
• HV30: The most commonly referenced. Roughly aligns with monthly option cycles.
• HV60 or HV90: Medium-term. Smooths out short-term noise.

HV characteristics:

• Volatile stocks (biotech, high-growth tech) typically have HV of 40-80%+
• Stable blue chips and utilities often have HV of 15-25%
• HV can change significantly over time — a stock with HV20 of 15% could see it spike to 50% during a market crash

HV vs IV — the volatility premium: The market consistently prices IV slightly above HV on average. This "volatility risk premium" is the theoretical basis for selling options. The market overestimates realized movement more often than it underestimates it, which means sellers collect more premium than the stock's actual movement justifies — over time and on average.

Quick Example

Stock YZA has an HV30 of 28% — over the past 30 trading days, it has moved at a rate that annualizes to 28%. Current IV for 30-day options is 42%.

IV is 14 points above HV. This means the market is pricing in 50% more movement than the stock has recently shown. If you believe the stock will continue its recent behavior, selling options at 42% IV when the stock only moves at 28% gives you an edge.

However, if earnings are in two weeks, that elevated IV might be justified — the stock could move far more than its recent history suggests.