Calculation and mechanics
The basis is the daily log return, the natural logarithm of the ratio of two consecutive closing prices. Over a window of, say, 30 trading days the standard deviation of these returns is taken and scaled to one year with the square root of 252 trading days. The result is directly comparable with implied volatility because both are expressed in percent per year.
The window length determines what the figure shows. 20 days react quickly to a single move, 60 days smooth it out. An HV of 15% means that the standard deviation of the daily returns in the window, scaled to one year, is 15%. With 252 trading days that corresponds to a daily volatility of 15% / sqrt(252), about 0.9%.
HV = stdev(ln(price t / price t-1)) x sqrt(252)
Distinction
Implied Volatility is the expectation priced into the option market, historical volatility the observation from the prices. The two can differ widely, for example ahead of a known event when prices are calm and options already price in the move that follows.
The IV/HV Ratio relates the two values. IV Rank, by contrast, compares implied volatility only with itself and does not use historical volatility at all.
Related terms
- Implied Volatility (IV)
- IV/HV Ratio (IV/HV, IV-HV ratio)
- IV Rank (IVR)
- Expected Move (EM, one standard deviation move)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.