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Calculating Historical Volatility
What Is Historical Volatility?
The three most common questions I get regarding historical volatility are:
What is Historical Volatility?
How do you calculate Historical Volatility?
And what’s the best number of days to use?
This article is about historical volatility in relation to trading options and not for risk management of
an asset portfolio.
Historical Volatility & Standard Deviation
Historical Volatility is the Standard Deviation of price returns (daily percentage price changes).
Historical Volatility calculates the probability of the magnitude of price changes in the future rather
than the direction of price changes.
For this article the closing price of the asset is used. While this is easily defined when speaking
about equities or other exchange traded products which have a closing price used for mark-to-market.
When speaking about Foreign Exchange or other OTC traded markets, decisions as to the closing
time has to be made.
Typically two closes will be used depending on location. For the United States the two closing times
are: 11AM New York time (4PM London Time) & 4PM New York Time. Best workflow practice
says to make your decision prior to creating your time series and remain consistent to your rules.
How Do You Calculate Historical Volatility?
The table below takes the reader through the historical volatility calculation step by step.
