What Is the Difference between Historical Volatility and Implied Volatility in Options Trading?
Historical Volatility (HV) is a backward-looking measure, calculated from the past price movements of the underlying asset over a specific period. It is a factual, statistical measure of past price dispersion.
Implied Volatility (IV), conversely, is a forward-looking measure derived from the current market price of an option. It represents the market's consensus expectation of the underlying asset's volatility for the remaining life of the option.
Traders use IV, not HV, in options pricing models to solve for the option's theoretical value.
Glossar
Options Pricing Models
Models ⎊ Options Pricing Models are mathematical frameworks, such as Black-Scholes or binomial trees, adapted to calculate the theoretical fair value of derivative contracts based on underlying asset dynamics and market parameters.
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.
Past Price Movements
Volatility ⎊ Past price movements, within cryptocurrency and derivatives markets, represent a historical record of asset price fluctuations, crucial for assessing risk parameters and informing option pricing models.
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.