Question · Options
Implied vs Historical Volatility: What Each Measures in Options
Implied vs historical volatility is a comparison between what a stock has done and what option buyers and sellers are paying for it to do next.
Short answer
Historical volatility measures how much a stock has actually moved, calculated from past prices. Implied volatility is the future volatility that current option prices assume. Comparing the two tells you whether options are priced for more or less movement than the stock has recently shown.
Are these options expensive? A $2 premium can be cheap on one stock and rich on another. The dollar figure never tells you which. Volatility does. Most platforms show an implied figure and a historical one, and they answer different questions.
What is historical volatility?
Historical volatility, or HV, is how far the price has actually moved. It is the standard deviation of daily returns, scaled up to a yearly figure so it can be compared with other stocks and with implied volatility.
Why the square root? If each day’s return is independent of the last, variance adds up day by day, so the variance over a year is 252 times the daily figure, and volatility, being its square root, is the daily figure times the square root of 252. Different lookbacks give different answers. A 20-day HV reacts quickly to a recent burst of movement, and a 100-day HV smooths it out, so check which window a platform uses before comparing figures across sources.
What is implied volatility?
Implied volatility, IV, is worked backwards from the option’s market price. An options pricing model takes the stock price, the strike, the time to expiry, interest rates and dividends, and needs one more input, volatility, to produce a price. IV is whatever volatility makes the model’s price match the market.
It is a forecast only in the sense that traders pay for it. Nobody sets it. If traders bid up the options, IV rises. If they sell them, IV falls.
Read it as an expected range. An IV of 35% implies a one-standard-deviation daily move of about 35% / 15.87 = 2.2%.
Why do the two diverge?
Now suppose that stock, with HV at 23.8%, has options trading at 35% IV. The market is paying for more movement than the recent past shows.
The usual reason is a scheduled event. Earnings, a court ruling, a drug trial result or a product launch can all move a stock sharply on one day, and options that expire after the event carry that risk in their price. Call the gap the event premium. Once the news is out, it tends to drain away overnight. That collapse is IV crush, and it is the reason a correct directional call bought before earnings can still lose money, as the strategy piece on buying calls before earnings sets out.
The gap can run the other way too. After a sudden large move, HV jumps because the big day is now in its window, while IV may already be settling back down as traders expect calm to return.
Where do you find each figure?
The option chain shows an implied volatility for every strike and expiry. They differ.
Out-of-the-money puts often carry higher IV than calls the same distance away, a pattern called skew, and near-dated options can show a higher IV than longer-dated ones when an event sits inside the nearer expiry. The single IV number on a quote page is a blend of these, and each platform builds its blend its own way. Historical volatility usually sits on an analysis or studies tab, with a choice of lookback window. Compare IV and HV from the same platform where you can.
How do traders use the comparison?
IV against HV
IV well above HV means rich options. Sellers of premium, such as covered call writers, collect more for the same strike. Buyers pay more and need a larger move to profit. When IV sits below HV, the reverse holds and buying options is relatively cheap.
IV rank
IV rank places today’s IV within its own past range, usually a year’s.
A rank of 50 means IV is halfway between its yearly low and high. It corrects for the fact that some stocks always carry high IV and others always carry low IV, so a 35% reading might be high for a utility and low for a small biotech company.
Some platforms show IV percentile instead, the share of days over the past year when IV was below today’s level, and because the two can differ a lot after a single spike, check which one your platform displays before acting on it.
What neither one tells you
They say nothing about direction.
Both measures describe the size of moves, up and down together. A stock with 60% IV is expected to move a lot. The number looks the same for a feared collapse and a hoped-for rally. For direction you need a view on the stock itself. For how an option’s price responds to the stock moving, look at delta. The options topic page covers the related strategies.
Questions traders ask next
What is a high IV rank?
IV rank places today's implied volatility within its own range over the past year, from 0 at the low to 100 at the high. A reading near the top of that range means options on the stock are priced for more movement than usual for that stock, which often happens before earnings or other scheduled news.
Does high implied volatility mean the stock will go down?
No. Implied volatility measures the expected size of moves in either direction, up or down. Fear before a sell-off can push it higher, and so can excitement before a product launch or an earnings report. The figure tells you how big a move is priced in, and says nothing about which way it goes.