Definition and explanation of historic volatility
As the name suggests, historical volatility (HV) is calculated by using past prices of a given financial asset (e.g., securities, bonds, market indexes, commodities) over a given period of time.
It is also known as statistical volatility (SV) because the most common way to calculate historic volatility is using the standard deviation of the average price.
A volatile market has a larger standard deviation and thus a higher historical volatility value. Conversely, a market with small fluctuations has a small standard deviation and a low historical volatility value.
The standard sample period for the calculation is one-year but historical volatility can be applied to any period of data. Option traders can use a period equal to the number of days left until expiration.
How to read historical volatility?
Historical volatility tells the expected price range of an asset over a specific time frame with a probability of 68%.
For example, if a specific stock has a price of $100, and the historical volatility of the stock is 10% over the past 30-days, one can expect the stock price to be in a range of $90 to $110 in the next 30-days with a probability of 68%.