Historical volatility, often referred to as statistical volatility, is a statistical measure of the dispersion of returns for a particular security or market index. Essentially, it gauges how much a stock, commodity, or index has moved in the past, which is used by traders to anticipate what might happen in the future.
Historical volatility is most commonly calculated by determining the average deviation from the average price of a financial instrument in the given time period.
It is important to remember that historical volatility is just that – historical. It uses past market data, giving a hindsight view. Therefore, while it doesn’t perfectly predict future price changes, it provides an idea of how the asset price has changed over time, which can offer insight into its potential future behaviour.
If a stock has high historical volatility, it means its price has experienced wide swings and, conversely, a stock with low historical volatility has experienced lesser price changes. Traders, particularly those working with options, use this information to help assess market risk and to calculate option pricing.
