How is historical volatility calculated?
What does historical volatility measure?
Historical volatility measures how much the underlying actually moved over a chosen window, usually as the annualised standard deviation of its returns. It is a measurement of the past, not an expectation — unlike implied volatility, which is derived from current option prices. Comparing the two puts today’s pricing in context.
How the number is built
Take the daily returns of the underlying over a window, commonly 20, 30 or 252 trading days, usually as log returns of closing prices. Compute their standard deviation, then annualise it by multiplying with the square root of the number of trading days in a year, by convention 252. The result is a percentage on the same annualised basis on which implied volatility is quoted, so the two can be compared directly.
Choices that change the result
The window decides what the number remembers. A 20-day HV reacts quickly and forgets a shock within a month; a one-year HV moves slowly and keeps an old sell-off in the figure long after the market calmed down. Close-to-close returns ignore what happened during the day, and a single gap after an announcement can dominate a short window. Two sources quoting different HV for the same stock are often just using different windows.
Reading it against IV
Implied volatility is the price the market sets on future movement; historical volatility is the movement that actually happened. When IV sits well above recent HV, options are priced for more movement than the stock has lately delivered. When IV sits below HV, buyers pay less than recent movement would justify. Models that take IV as their input, such as the IV method for probability of profit, assume IV is a fair forecast of realised movement.
The common misreading
A gap between IV and HV is often read as proof that options are mispriced. HV only looks backward: it knows nothing about an upcoming announcement, a changed business or a market that is about to get rougher, and IV does. A premium above HV can be fair payment for a risk the past window simply did not contain. The comparison raises a question; it does not answer it.
Worked example
Hypothetical numbers for illustration, not a market quote and not a recommendation.
An example stock’s daily returns over the last 30 trading days have a standard deviation of 1.5 %. Annualised with the trading-day convention, that is 1.5 % × √252 ≈ 23.8 %. Its at-the-money options trade at a hypothetical implied volatility of 30 %, about 6 points above what the stock has realised.
The options are priced for more movement than the recent past showed. Whether that premium is too much depends on what lies ahead, not on the 30 days behind.
Strategies where the term matters
- Long Straddle — Does the move have to be bigger than the one the market has already priced in?
- Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?
- Bull Put Spread — Do you want a credit against an obligation - or would you rather pay a debit?
Calculators for this term
Track it in your journal
Related terms
Every term in one place: the options glossary.
This material is general information about option strategies, written for a general audience. It is not investment advice, not a recommendation, and not financial analysis. Options can lose their entire value, and uncovered positions can lose more than the amount committed. Anything said about tax is general in nature and is no substitute for professional tax advice. Last reviewed: 2026-08-06.