Implied Volatility vs Historical Volatility
Implied volatility and historical volatility measure different things. One reflects what the market expects to happen, while the other shows what has already happened. Knowing which one to use prevents misreading risk.
Options traders rely on implied volatility for pricing and strategy. Historical volatility provides context for whether current expectations are elevated or depressed.
Quick Comparison
| Dimension | Implied Volatility (IV) | Historical Volatility (HV) |
|---|---|---|
| Source | Option prices | Past price movement |
| Orientation | Forward-looking | Backward-looking |
| Changes with | Supply & demand | Realized price swings |
| Best for | Pricing / strategy / expected move | Context + regime comparison |
When to Use Implied Volatility
Implied volatility is derived from option prices and reflects the market's expectation of future price movement. It's the primary input for options pricing models and strategy selection.
- •Pricing options and assessing fair value
- •Comparing expensive vs cheap options (IV rank / percentile)
- •Calculating expected move for a given timeframe
- •Understanding Greeks sensitivity (especially Vega)
- •Selecting strategies based on volatility environment
When to Use Historical Volatility
Historical volatility measures how much price has actually moved in the past. It's useful for context — understanding whether current implied volatility is high or low relative to realized behavior.
- •Understanding realized risk over a lookback period
- •Backtesting assumptions about price movement
- •Comparing current volatility to past regimes
- •Validating whether IV is elevated or depressed vs reality
Historical volatility is typically calculated in spreadsheets or charting platforms (like TradingView), then compared against current implied volatility.
Note: Historical volatility is informational, not predictive. Past movement does not guarantee future movement.
Which Should You Use?
- If you are trading options → use implied volatility. It's baked into option prices and determines what you pay.
- If you are evaluating past price behavior → use historical volatility. It tells you what actually happened, not what the market expects.
- If you are comparing expectations to reality → use both. When IV is much higher than HV, options are expensive. When IV is lower than HV, options may be cheap.
Related comparisons
Stability vs growth sizing — which fits your edge and tolerance?
Per-trade risk control vs long-run blow-up probability.
Why price moves vs what you make/lose at expiration.
Related Strategy Guides
Frequently Asked Questions
Is implied volatility predictive?
Implied volatility reflects what the market expects, not what will happen. It's priced into options as a consensus forecast, but actual price movement often differs. Think of IV as the market's best guess, not a guarantee.
Why does implied volatility change without price movement?
IV is driven by supply and demand for options, not just stock price. Events like earnings, Fed announcements, or market uncertainty can spike IV even if the underlying hasn't moved. After the event, IV often collapses ("vol crush").
Is historical volatility useful for options trading?
Yes — as context. Comparing IV to HV helps you understand if options are relatively expensive or cheap. If IV is 40% but HV is only 20%, the market expects more movement than recent history suggests. This can inform strategy selection.
Should I compare IV to HV before trading?
Many traders do. When IV is significantly higher than HV, selling premium may be attractive. When IV is lower than HV, buying options might offer better value. This comparison is called the "volatility risk premium."
Why do traders care more about implied volatility?
Because IV is what you pay for. Option prices are directly determined by implied volatility. Historical volatility tells you what happened — IV tells you what the market is charging you to bet on what might happen next.