Historical volatility (also called realized volatility) measures how much a stock's price actually bounced around in the past, usually over the last 20-30 trading days.
Historical volatility is the standard deviation of daily price returns. A stock that swings 2-3% per day has higher historical volatility than one that moves 0.5% per day.
Historical Volatility — What actually happened (past data)
Implied Volatility — What the market expects to happen (future forecast)
These two can differ wildly. A stock might have low historical volatility (it's been calm) but high implied volatility (traders expect chaos ahead, like before earnings).
If historical volatility is 20% and implied volatility is 60%, options are expensive. The market is pricing in more chaos than historically occurred. Sellers like this, buyers don't.
If historical volatility is 60% and implied volatility is 20%, options are cheap. The market is underpricing risk. Buyers like this, sellers don't.
Traders compare historical volatility to implied volatility to find trading opportunities. When implied is much higher than historical, options might be overpriced. When implied is much lower than historical, they might be underpriced.
Related: Implied Volatility, Volatility Rank, Volatility Percentile
