What is historical volatility?
In one line: Historical volatility, also called realized volatility, is how much a stock's price actually moved over a past period, stated as a yearly percentage, as opposed to implied volatility, which is the move the options market expects.
How it works
Historical volatility (HV) looks backward. It takes a stock's daily price changes over a set window, often the last 20 or 30 trading days, and works out how spread out they were. The result is written as a yearly percentage, the same way Implied volatility (IV) is, so the two can be compared.
HV of 20% means the stock's daily moves have been fairly calm. HV of 60% means wild swings.
IV looks forward. It's the move the options market is pricing in. The gap between the two is the whole point:
- IV above HV: options are priced for bigger moves than the stock has been making. Premiums are rich relative to the recent past.
- IV below HV: options are priced for calmer moves than the stock has actually shown. Premiums are thin.
Sellers in the wheel strategy tend to prefer the first case. It's not a guarantee that the stock stays calm, only that the premium is paying for more than the recent history shows.
An example (hypothetical)
An illustration, not a trade idea. Made-up stock XYZ trades at $50. Its 30-day HV is 20%. Its 30-day IV is 35%. The 30-day $45 put pays $0.90.
The options market expects XYZ to move much more than it has been. Two ways that can go:
| What the next 30 days bring | XYZ at expiry | Short $45 put |
|---|---|---|
| Stock stays as calm as its HV suggested | $49 | +$90 |
| Stock moves about as much as IV priced in, upward | $55 | +$90 |
| Stock drops a bit more than IV priced in | $42 | Assigned at $45: +$90 − $300 = −$210 |
| News hits; the stock moves far more than either | $36 | Assigned at $45: +$90 − $900 = −$810 |
High IV over low HV was a reason the premium was good. It was also a hint that someone expected news. The last row is why the hint matters.
Why it matters for sellers
HV gives you a floor for judging a premium. If IV is only just above HV, you're being paid about what the stock's recent moves deserve. If IV sits well above HV, you're paid extra for an expected event, and you should find out what that event is. Usually it's earnings, a product date or a court ruling on the calendar.
Two cautions:
- HV changes with the window. A 10-day HV after one wild week looks very different from a 100-day HV. Check which one your platform shows.
- HV is the past. A calm stock can start moving tomorrow. HV tells you what it did, not what it will do.
A simple habit: write IV and HV side by side on every trade you log. Over time you'll see whether the gap predicted anything for you.
Questions
What is the difference between historical and implied volatility?
Historical volatility measures the stock's real past moves. Implied volatility is the move the options market expects, read from option prices. One is a record, the other a forecast.
Is high historical volatility good for selling options?
Not by itself. High HV means the stock really does swing, so assignment is more likely. Sellers usually look for IV that is high compared with HV, which means the premium is paying for more than the stock has shown.
How is historical volatility calculated?
Take the daily percentage changes over a window, find their standard deviation, and scale it to a year by multiplying by the square root of about 252 trading days. Most platforms do this for you.
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