I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Wednesday, August 29, 2007

Relationship between Historical Volatility (HV) and Implied Volatility (IV)

In the previous posts, we’ve discussed about the differences between Historical Volatility (HV) and Implied Volatility (IV) and the sources / websites to get such info.
In this post, we’ll talk further about the relationship between HV & IV.

What is the relationship between Historical Volatility (HV) and Implied Volatility (IV)?
At a certain point of time, IV is hardly related to HV because IV represents future expectations of stock price movement due to certain reasons, which may not be reflected in Historical Volatility (HV).
Remember that IV is a prediction of stock’s volatility for the next 30 trading days, whereas HV is a measure of stock’s volatility over the past 30 trading days.
When we’re expecting some important events will happen in the next 30 days (e.g. earnings announcement, FDA approvals, etc.), IV will be relatively high. But this may not be reflected in the “what has happened” during the past 30 days. Hence, we can’t really compare or relate IV vs. HV figures at a particular point of time.

Nevertheless, the highest, lowest & average points of HV usually might provide some benchmarks for IV. Highly volatile stocks tend to have relatively higher IV than less volatile stocks, because highly volatile stocks have higher historical volatility as compared to less volatile stocks.

For example:

Picture courtesy of: www.ivolatility.com

As can be seen in the above pictures, AAPL’s IV numbers (gold colored line) range between 24% to 54%, while its HV figures (blue colored line) also fluctuate in about the same range.
In contrast, LMT’s IV varies between 15% to 35%, whereas its HV ranges from 11% to 36%. (Before the recent sell-off starting from mid July, the IV & HV only range between 15% to 24% and 11% to 24%, respectively. During massive sell-off periods, volatilities normally increase across almost all stocks, reflecting greater overall market uncertainties).
APPL is more volatile than LMT, as reflected in the Historical Volatility figures, and consequently, AAPL’s Implied Volatilities are generally higher than LMT.

There is no standard figure to determine if IV is high or low across all stocks. Implied volatilities of a stock should be compared against its own previous IV figures, not with the other stocks.
For example, IV = 34 can be considered very high for LMT, but it is deemed quite low (average) for AAPL, when it’s compared relatively to its individual stock’s past IV data.

To understand more about Implied Volatility, go to: Understanding Implied Volatility (IV).

Related Posts:
* FREE Trading Videos from Famous Trading Experts
* Option Greeks: VEGA
* Options Pricing: How Is Option Priced?


Tony Chai said...

Hi :

Nice blog you have.

Many beginner option traders wonder why their stock move in the right direction but their option trade still lose money.

Implied Volatility (IV) of an option is usually inflated before an event (eg. earnings, FDA announcement, merger ) and would usually implode the moment the event is announced.

The option will only make money if the gapping up/down in the anticipated direction is big enough to cover the inflated premium paid.

Keep up your good work.

Yours Truly,

Tony Chai
a disabled stock option trader


Hi Tony,

Thanks. You've a nice blog too.

About the IV, yes, you're right.
Thanks for your inputs. :)

Btw, I'll be discussing about the topic deeper in my next posts in the near future.

Take care.

Best Regards,