Historical Volatility

Historical Volatility is a statistical calculation that tells option traders how rapid price movements have been over a given time Frame. The most common method of calculating historical volatility is called the Standard Deviation. Standard Deviation measures the dispersion of a set of data points from its average. The more disperse (spread out) the data is, the higher the deviation. This deviation is referred by traders as volatility. Don`t get too caught up in trying to understand the how`s and whys of the standard deviation, just accept that all traders use this method for determining historical volatility. However, if you want more of an explanation you can refer to Appendix C of Option Volatility & Pricing for a calculated example of standard deviation. Or, you can download the Historical Volatility.xls Spreadsheet for an example of how to calculate historical volatility. Assets that have large and frequent price movements are said to be volatile or said to be of high volatility. Consequently, assets whose price movements are slow and predictable are said be low volatile instruments. Take a look at the following examples of high and low volatile assets. Take a look at the examples below of a highly volatile stock and a low volatile stock.