Options Glossary

Glossary: Historical Volatility

Last Updated: July 12, 2015


Historical Volatility

What Does Historical Volatility Mean in Options Trading?

The past measurement of the volatility (average deviation from the average price) of any security over a given timeframe. In general, the higher the underlying's historic volatility the riskier the security.

How to Use In the Brutus Options Ranker

You can add historic volatility to your Brutus Options Ranker strategy.  This criterion is often added in conjunction with implied volatility.  For example:

  • With net-short options trading setups, you can look to minimize historic volatility while maximizing implied volatility.  This gives a strong indication that the option or spread has rich premium and therefore is a good sell candidate.
  • With net-long options trading setups, you can look to maximize historic volatility while minimizing implied volatility.  This gives a strong indication that the stock or ETF has historically moved more than priced into implied volatility.

However you use the measure, it is important to remember that historic volatility is constantly changing and is not always a good prediction of future volatility.  For example, a stock may have just come out of an earnings announcement and therefore reports high historic volatility but is now in consolidation and may trend fairly neutral for some time.

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