Historical Volatility (Statistical Volatility)

 

Definition

The term historical volatility refers to a measure that allows an investor to understand how much the price of a stock moved over time.  As is the case with implied volatility, historical volatility is an important concept for option investors to understand.

Explanation

Also referred to as statistical volatility and HV, historical volatility is a measure of a security's past price movement.  It does not provide the investor with an account of the price direction, only a statistical result that reveals the magnitude of its change.  It's viewed by analysts as an account of a stock's historical trading range.

Historical volatility is a mathematical concept and it's often depicted using the Greek letter sigma σ since it's a measure of the data's standard deviation, which is the quantification of the variation in a set of data. Historical volatility is an especially important concept to individuals that invest in options.  While HV provides insights into a security's prior price swings, a stock's statistical trading range in the past is no guarantee of future results.

Historical volatility is a function of factors such as market demand.  As market demand for a security increases, the price of the security will increase as will its volatility.  As market demand for a security decreases, the price of the security will decrease and its volatility will also increase.  Relatively high historical volatility values indicate a relatively wide range of historical prices, while relatively low historical volatility values indicate a relatively tight range of historical prices.

Historical volatility provides investors with insights into the past price movement of a security.  This contrasts with implied volatility, which provides investors with insights into the current market sentiment towards a security.

Related Terms

deep in-the-money, in-the-money, at-the-money, implied volatility