What Is Historical Volatility ?
Volatility can be split in two - historical volatility (HV) and implied volatility (IV). I myself place more emphasis on implied volatility. Implied volatility is derived from option prices and provides clues about the current sentiment of option investors.
Compared to implied volatility, historical volatility, similar to most indicators, looks backwards at price action to measure the degree of change in the price of a security.
Questions to ask yourself when viewing HV
1. What period or length do I use?
2. What method of measurement is used?
The appropriate look-back period to use for historical volatility calculations is ultimately a matter of personal taste.
For the daily chart, the most frequently used historical volatility measurement is HV (30), which translates to about 43 calendar days. Most providers of HV data tend to standardize on HV (30). I prefer HV (21) as this is a better approximation of a trading month. HV (10) is better used for short time frames, however, investors should be wary of noise when looking back less than 20 HV length. HV (60) is a popular way to capture the entire earnings cycle.
To capture the big picture, traders might want to look at HV (250), which allows you to capture the entire year. HV (500) will allow you to look at two years. HV (500) is good to use when you have statistical outliers such as 2011 Silver market, 2008 oil market or 2008-09 Financial Crisis.
Historical Volatility does not capture the magnitude of any intraday price movements, which are better served by calculations such as an average true range -- ATR
HV/IV Applied to Option Trading
When HV readings / IV sentiment is low you should view this as overly optimistic and or the underlying is stuck in a trading range. This is also a good measure of how cheap your options are, depending on trading strategy and the length you are looking at i.e. HV (10) for day traders or HV (500) for position traders. When HV readings and IV sentiment is high you should view this as overly pessimistic and or a period of high volatility. Higher the IV and HV the more expensive your options are.
Volatility can be split in two - historical volatility (HV) and implied volatility (IV). I myself place more emphasis on implied volatility. Implied volatility is derived from option prices and provides clues about the current sentiment of option investors.
Compared to implied volatility, historical volatility, similar to most indicators, looks backwards at price action to measure the degree of change in the price of a security.
Questions to ask yourself when viewing HV
1. What period or length do I use?
2. What method of measurement is used?
The appropriate look-back period to use for historical volatility calculations is ultimately a matter of personal taste.
For the daily chart, the most frequently used historical volatility measurement is HV (30), which translates to about 43 calendar days. Most providers of HV data tend to standardize on HV (30). I prefer HV (21) as this is a better approximation of a trading month. HV (10) is better used for short time frames, however, investors should be wary of noise when looking back less than 20 HV length. HV (60) is a popular way to capture the entire earnings cycle.
To capture the big picture, traders might want to look at HV (250), which allows you to capture the entire year. HV (500) will allow you to look at two years. HV (500) is good to use when you have statistical outliers such as 2011 Silver market, 2008 oil market or 2008-09 Financial Crisis.
Historical Volatility does not capture the magnitude of any intraday price movements, which are better served by calculations such as an average true range -- ATR
HV/IV Applied to Option Trading
When HV readings / IV sentiment is low you should view this as overly optimistic and or the underlying is stuck in a trading range. This is also a good measure of how cheap your options are, depending on trading strategy and the length you are looking at i.e. HV (10) for day traders or HV (500) for position traders. When HV readings and IV sentiment is high you should view this as overly pessimistic and or a period of high volatility. Higher the IV and HV the more expensive your options are.