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Historical Volatility - YouTube
Channel: Option Alpha
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hey everyone this is kirk here again at
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option alpha and in this video we're
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going to go through
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historical volatility and just basically
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answer the question what is historical
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volatility
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how can we potentially use it how is it
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derived and one thing you have to
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understand about historical volatility
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is that it really should be called even
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though historical makes
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some sense in many cases but it's really
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statistical
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volatility that we see so i think of it
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as
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actually statistical volatility which is
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this is the volatility that we
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actually see in the market going back in
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time
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so a lot of people use historical
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because it's you know
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backward looking and it's history i
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think statistical is a more appropriate
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way to think about it because it is
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truly that it's just a statistic that we
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can use
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as a basis and a framework for what we
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might do or how we might
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think about options or the security
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moving forward so you basically have two
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things going here
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at the same time one you have the stock
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which is just trading in its range and
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moving up and down all the way until
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today so
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could be going in a zigzag fashion could
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just be simply trending and just
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continuing to move straight upward
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as it moves forward in time and as the
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stock continues to move
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we calculate our broker platforms
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calculate this
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moving average of backward looking
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historical
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volatility and basically what it's doing
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is it's taking a snapshot in time and
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it's saying
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okay between this point here and this
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point here
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how much statistical volatility did this
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security experience
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was there a lot of movement between this
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point and this point
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or did it have very little movement so
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in the case of this particular
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stock which is the more jagged and
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volatile one
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between these two data points this stock
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had a lot more statistical volatility
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moved a lot more
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than this stock here which just went on
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a very simple
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upward sloping trend and then what they
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do is they take that and they graph
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that line down here to show statistical
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volatility going back in time
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and so what we can do as traders is we
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can take today's data point and look
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backwards and see how much volatility
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the stock has
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experienced between today's price now
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so today and whatever point we're
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looking back at
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in the future and so this data point
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here tells us that
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okay from today back maybe we've seen
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10 percent historical volatility in the
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stock
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or maybe we're looking at a stock that
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has gone through a lot more volatility
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up and downs historically and maybe the
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historical
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volatility on this stock is 15 percent
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from today
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back to the beginning of that chart now
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what's interesting to me is that this
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really doesn't do
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anything for us to project what might
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happen in the future
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so a lot of people incorrectly use
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historical volatility to suggest
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that if there is high volatility in the
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past there's going to be high volatility
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moving forward but guess what we have no
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idea what's going to happen moving
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forward this is where
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we talk about implied or expected future
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volatility expectations
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in other videos what you should
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understand at this point is that
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historical volatility is
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just a data point that we can look at to
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make some assumptions about where things
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have been
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and where they might go in the future
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but that definitely doesn't mean that a
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stock can then
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change direction or couldn't change
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direction and in this case the one
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that's really jagged
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becomes very very flat after today so
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for some reason just starts trading
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absolutely sideways
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and the one that seemed like it had
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really low historical volatility
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starts trading all over the place as it
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moves forward so anything can happen
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from today forward
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but again this historical volatility
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just tells us how volatile the stock has
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been
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in the past two things that you could
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look at for historical volatility
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are not only just the reading itself
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which we've covered here
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but the other thing you can look at is
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you can look at the changes in different
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volatility
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ranges so if we actually track
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volatility going back 30
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days we might see that a stock has 25
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volatility over the last 30 days
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if we go back 180 days we might actually
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see that that same stock has
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45 percent statistical or historical
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volatility
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over the last 180 days now that to me is
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significant because that might suggest
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that the stock is starting to
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calm down and is maybe not trading as
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aggressive or as volatile as it had
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previously in the last 180 days
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so if i see something where the 30-day
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volatility is really low
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but the 180-day volatility is actually
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much higher i might assume
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that or might prepare myself to expect
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the stock to be more volatile moving
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forward
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more in line with its more longer term
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average
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again this can happen in reverse where
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you see implied volatility on
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the front 30-day or 60-day or 10-day you
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can do it a bunch of different ways
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there's no
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real right way to do it or wrong way to
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do it but you might see
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implied volatility on the 30 days of 45
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and you might see implied volatility
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over the last 180 days of only 10
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and so this would suggest whoa there's
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something happening that's been
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happening recently the stock has been
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really really volatile
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did something change with the company
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did something change with the industry
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your sector
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this thing is usually a lot more calmer
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that doesn't mean it's not going to be
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more volatile or won't you know end its
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volatility and be calm moving forward
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but
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again it's just an interesting data
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point to see where those different
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changes are in historical volatility
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so as always hopefully this helps out if
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you have any other questions let us know
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and until next time happy trading
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you
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