Historical Volatility
Historical (realized) volatility measures how much an underlying actually moved in the past, computed from its price returns and annualized as a percentage.
It is the standard deviation of the underlying’s log returns over a lookback window (e.g. 20 or 30 days), scaled by √252 to annualize.
Comparing historical to implied volatility shows whether options look rich or cheap: IV well above realized vol suggests options are pricing in more movement than has occurred.
Example. If a stock’s daily returns have a 1.26% standard deviation, its annualized historical volatility is about 20% (1.26% × √252).
FAQ
How is historical volatility calculated?
Take the standard deviation of daily log returns over a window and multiply by √252 (trading days per year) to annualize it.
Why compare historical and implied volatility?
When implied volatility is much higher than recent realized volatility, option premiums may be expensive relative to how the stock has actually moved.