Separate realized past movement from the volatility embedded in current option premiums and use the comparison carefully.
Historical volatility
Historical or realized volatility is calculated from past price returns over a chosen window. A 20-day reading and a one-year reading can differ because they summarize different market regimes.
Implied volatility
IV is the volatility input that reconciles a model with current option prices. It reflects forward uncertainty, event risk and supply-demand effects, so it does not need to match recent realized movement.
Comparing the two
The gap can help frame a question about whether options appear expensive or cheap relative to recent movement, but it is not an automatic trade signal. Future realized volatility is unknown, and IV often includes compensation for tail risk.
A practical example
A stock realized 18% volatility over the past month while its options imply 32% ahead of earnings. The gap may reflect the approaching event rather than a simple pricing error.
This simplified example holds other inputs constant to isolate volatility exposure. Live option prices also reflect the underlying price, time decay, rates, dividends, liquidity and transaction costs. Greeks are theoretical estimates, not guarantees.
Frequently asked questions
Which measure predicts the future?
Neither is a guaranteed forecast; IV reflects current forward-looking pricing while historical volatility is backward-looking.
What window should I use for historical volatility?
Match the window to the horizon being studied and test several regimes.
Is IV usually higher?
It often includes a risk premium, but the relationship changes over time.
Continue the Vega & Volatility cluster
Explore related guides: IV Rank vs IV Percentile · Vega-Neutral Option Strategies · Vega in Long Options vs Short Options. For a structured sequence, use the free Level 6 – Vega & Volatility course.
Options involve risk and are not suitable for every investor. This material is educational and is not investment, tax or legal advice. Greeks are theoretical estimates, and contract terms and broker requirements can vary.