Historical volatility (HV), also called realized volatility, measures how much a stock has actually moved over a past window, while implied volatility (IV) measures how much movement the options market is pricing in for the future. The gap between them, usually expressed as IV minus HV or as the ratio IV ÷ HV, is a rough gauge of whether options are expensive or cheap relative to the stock's recent behavior.
How it works
Historical volatility is calculated from closing prices:
- Take the daily log return for each session: ln(today's close ÷ yesterday's close).
- Compute the standard deviation of those returns over the window, commonly 20 or 60 sessions.
- Multiply by √252 to annualize it, so it is on the same scale as IV.
Implied volatility comes from option prices instead, so it looks forward and reflects what traders are willing to pay. Because both are annualized percentages, they can be compared directly.
Over long periods, implied volatility on broad indices has tended to exceed the volatility that was later realized. This difference is known as the volatility risk premium: option buyers pay for protection against sudden large moves, and sellers are compensated for carrying that risk. The premium is not constant. It narrows, and can turn negative, during sharp sell-offs when realized volatility overtakes what options had priced.
How to read it
- Ratio well above 1. Options price more movement than the stock has recently delivered. Premium sellers have historically been better compensated in this condition, provided nothing in the window justifies the gap.
- Ratio well below 1. Options price less movement than recent history. Buying options is relatively inexpensive, though a quiet period ahead can still make them lose value.
- Short vs long windows. HV20 above HV60 means the stock has become more volatile lately; HV20 below HV60 means it has calmed down.
- Events in the window. A scheduled earnings report or a pending decision justifies IV above HV, because the event has not happened yet and HV cannot see it. See IV crush.
Keep in mind that an option's outcome depends on IV against the volatility realized over the option's remaining life, which is unknown when the trade is opened. Past HV is only a reference point.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $200. Its 30-day IV is 36%, its 20-day HV is 24% and its 60-day HV is 26%.
- IV ÷ HV20 = 36 ÷ 24 = 1.5; IV minus HV20 = 12 points.
- Implied daily move: 36% ÷ 16 ≈ 2.25%, about $4.50. Recent realized daily move: 24% ÷ 16 = 1.5%, about $3.
- Options are pricing roughly 50% more movement than the stock has delivered recently.
If an earnings report falls within the next 30 days, much of that gap is the event being priced in. If no event is scheduled, the reading suggests options are rich. In the opposite case, an IV of 18% against an HV20 of 30% gives a ratio of 0.6, and options look cheap.
Limitations and common mistakes
- HV is backward-looking. It describes the past window, not the coming one.
- One large day distorts it. A single gap inflates HV20 for 20 sessions and then drops out abruptly, which can flip the ratio without any change in options.
- Close-to-close data misses intraday swings. A stock can trade in a wide range each day and still show low HV. The average true range captures daily range better.
- Rich can stay rich. Selling premium because IV exceeds HV carries tail risk: one gap can outweigh many months of collected premium.
- Very low HV makes the ratio unstable. When HV is small, a modest IV produces a large ratio; check the point spread as well.
In Clear Tape
For Pro members, the Skew and volatility panel on the Options page shows IV 30-day, realized volatility over 20 and 60 days (close-to-close, annualized), IV ÷ realized, IV minus realized and a one-year IV rank. It labels the reading rich when IV is at least 1.3 times 20-day realized volatility, cheap at 0.8 times or below, and fair in between. The watchlist scan shows IV30, HV20 and IV ÷ HV for every stock you follow, and the Options strategies section counts rich or cheap options among the reasons behind each strategy's fit rating. Member data reflects the previous session's close. See pricing.
For educational purposes only. Not investment advice.