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Wednesday, November 17, 2010

Historical Volatility – Part 2: Formula to Calculate HV

Go back to Part 1: Definition of Historical Volatility

As mentioned in Part 1, to obtain Historical Volatility, we need to calculate the standard deviation of the price returns using historical data (which can be in terms of daily, weekly, monthly, quarterly or yearly) over a certain period.
Commonly, the daily price data for the period of 10 days, 20 days, or 30 days are used.

Theoretically, the formula to calculate Historical Volatility (i.e. standard deviation of % stock’s returns) is as follow:

































After the standard deviation is calculated, we then need to annualize it.
To annualise the Standard Deviation resulted from formula (1) in order to get Historical Volatility (HV):









The formula above may look complicated. However, they are actually quite simple with the help of MS Excel to calculate it.
We’ll discuss it further along with the example in the next part.

Continue to Part 3: Steps to Calculate HV using MS Excel (with Example).

To view the list of all the series on “Historical Volatility”, please refer to:
More Understanding about HISTORICAL VOLATILITY


Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2