A Guide to Historical Volatility

By Mike Zaccardi, CMT, CFA · March 15, 2022 · 6 minute read

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A Guide to Historical Volatility

Historical volatility (HV) measures the range of returns on a market index or security over a given time period. When an asset’s historical volatility is going up, that means its price is moving further away from its average (in either direction) more quickly than usual.

A stock’s historical volatility is typically one standard deviation using daily returns, and it’s one factor that investors often look at to gauge the risk of a potential investment. An asset’s historical volatility is different from its implied volatility. Read on to learn what historical volatility is, how historical volatility works, and how to calculate historical volatility.

What Is Historical Volatility?

Historical volatility is a statistical measurement of the price dispersion of a financial security or index over a period. Investors calculate this by determining the average deviation from an average price. Historical volatility typically looks at daily returns, but some investors use it to look at intraday price changes.

Analysts can use any number of trading days when calculating historical volatility, but typically options traders focus on a time period between 10 and 180 days. Options traders use historical volatility and implied volatility when analyzing trading ideas.

Investors typically express historical volatility as a percentage reflecting the standard deviation from the average price, based on past price behavior, but there are also other methods they can use to determine an asset’s historical volatility. Unstable daily price changes often result in high historical volatility readings.

How Historical Volatility Works

Historical volatility takes past price data to calculate an annualized standard deviation value that measures how much past prices deviate from an average price over a given period. When a stock sees large daily price swings compared to its history, it will typically have a historical volatility reading. Historical volatility does not measure direction; it simply indicates the deviation from an average.

When a stock’s historical volatility is rising or above average, it means daily price changes are larger than normal. When it is lower than average, a stock or index has been relatively calm.

How Historical Volatility is Calculated

The historical volatility formula is typically a standard deviation measurement. It takes a stock’s daily price changes and averages them over a period. There are several steps to calculating historical volatility:

1.    Collect historical prices

2.    Calculate the average historical price over a period

3.    Find the difference between each day’s price change versus the average

4.    Square those differences

5.    Find the sum of those squared differences

6.    Divide those differences by the total number of prices (this finds the variance)

7.    Calculate the square root of the variance

The historical volatility formula is a tedious step-by-step process, but most brokerage platforms automatically calculate it. Many brokers even offer historical volatility charts. With a historical volatility chart, you can easily compare changes through time. For example, if a stock reacted sharply to an earnings release, the historical volatility charts will show a jump immediately after the earnings date while implied volatility might drop sharply after the earnings report.

How to Use Historical Volatility

Traders sometimes use historical volatility to help set stop-loss levels. For example, a day trader might take three times a stock’s daily average range – a measure of historical volatility – to set a stop price. This is known as volatility ratio trading.

Traders also use historical volatility when analyzing a stock, fund, or index to get a sense of its riskiness. High or low historical volatility stocks are not inherently bullish or bearish. Day traders might seek high historical volatility stocks as candidates for high-profit trading opportunities (but they also come with high loss potential).

You can also use historical volatility to help determine whether a stock’s options are expensive to help determine an options trading strategy. If implied volatility is extremely high when compared to a stock’s historical volatility, traders may decide that options are undervalued.

Historical vs Implied Volatility

Like historical volatility, it measures fluctuations in an underlying stock or index over a period, but there are key differences between the two indicators. Implied volatility is a forward-looking indicator of a stock’s future volatility.

The higher the historical volatility, the riskier the security has been. Implied volatility, on the other hand, uses option pricing to arrive at a calculation and estimate of future volatility. If implied volatility is significantly less than a stock’s historical volatility, traders expect a relatively calm period of trading, and vice versa.

Typically, when implied volatility is low, options pricing is low. Low options prices can benefit premium buyers. Sometimes investors will use a graph to determine how an option’s implied volatility changes relative to its strike price, using a volatility smile.

Historical Volatility

Implied Volatility

Measures past price data to gauge volatility on a security Uses forward-looking option-pricing data to gauge expected future volatility on a security
Higher historical volatility often leads to higher options pricing and higher implied volatility Imminent news, like a company earnings report or a key economic data point, can drive implied volatility higher on a stock or index
Traders can use historical volatility to help set exit prices Traders can use implied volatility to find stocks expected to exhibit the biggest price swings

The Takeaway

Historical volatility is a useful indicator for both institutional and retail investors looking to get a feel for the level of recent fluctuations in a stock or index has been in the recent past. It measures a security’s dispersion of returns over a defined period. Implied volatility is a similar tool, but it is forward-looking and uses option pricing to arrive at its output.

Options trading and the use of historical volatility is helpful for some advanced traders. If that sounds like you, an options trading platform like SoFi could be worth considering. Its intuitive and approachable design offers investors the ability to place traders from the mobile app or desktop platform. Plus, there are educational resources about options available in case you want to answer a question or learn more about a certain topic.

Trade options with low fees through SoFi.


What is considered a good number for historical volatility?

It depends. While one stock might have a high historical volatility reading, perhaps above 100%, another steady stock might have a low figure around 20%. The key is to understand the securities you trade. Historical volatility can be an indicator of a stock’s volatility, but unforeseen risks can turn future volatility drastically different than the historical trend.

What is a historical volatility ratio?

The historical volatility ratio is the percentage of short-to-long average historical volatility on a financial asset. You can interpret the historical volatility ratio by looking at short versus long historical volatility. If short volatility on a stock drops below a threshold percentage of its long volatility, a trader might think there will be a jump in future volatility soon.

This is similar to analyzing volatility skew in options. It is important to remember that the interpretation and technical rules of historical volatility can be subjective by traders.

How is historical volatility calculated?

Historical volatility calculations require finding the average deviation from the average price of an asset over a particular time. An asset’s standard deviation is often used. Historical volatility is usually stated as one standard deviation of historical daily returns.

Many trading platforms automatically calculate historical volatility, so you don’t have to do the calculations manually.

Photo credit: iStock/Eva-Katalin

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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