Historic Volatility is the standard deviation of the "price returns" over a given number of sessions, multiplied by a factor (260 days) to produce an annualized volatility level.
A "price return" is the natural logarithm of the percentage price changes or ln[Pt / P(t-1)].
How it works
- In Historical volatility, traders use past trading ranges of underlying securities and indexes to calculate price changes.
- Calculations for historical volatility are generally based on the change from one closing price to the next.
- Historical Volatility does not measure direction; it measures how much the securities price is deviating from its average.
- When a security’s Historical Volatility is rising, or higher than normal, it means prices are moving up and down farther/more quickly than usual and is an indication that something is expected to change, or has already changed, regarding the underlying security (i.e. uncertainty).
- When a security’s Historical Volatility is falling, things are returning to normal (i.e. uncertainty has been removed).