How Does Implied Volatility Differ from Historical Volatility in Options Pricing?
Historical volatility (HV) is a backward-looking measure, calculated from the actual past price movements of the underlying asset over a specific period. Implied volatility (IV) is a forward-looking measure, derived from the current market price of an option using a pricing model like Black-Scholes.
IV represents the market's expectation of future price swings. Option premiums are directly priced based on IV, not HV.
Glossar
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.