⏱ 1-Minute Summary Volatility measures how much a price moves: its magnitude, not its direction. HV (historical volatility) measures how much it has moved in the past; IV (implied volatility) measures how much the market expects it to move. Because IV tends to revert toward HV, a common edge is to sell premium when IV is high and buy when IV is low.
1. What Is Volatility?
Volatility answers one question: how big are the price swings? It says nothing about which direction the price is heading.
- High volatility: large daily swings in both directions.
- Low volatility: small, calm moves.
For options, volatility is the single most important input. Options on volatile stocks cost more because the chance of a big move is larger. This is why traders say volatility is the single most important driver of option prices.
2. Historical Volatility (HV) and Its Windows
Historical volatility (HV) is the realized volatility of past returns, a measure of how much the stock has actually moved.
HV is usually computed over a lookback window. Common windows are HV10, HV20, HV30, HV60 (trading days). Each answers the same question with a different window: HV10 expresses how volatile the stock has been over the last 10 trading days, HV20 over the last 20, HV30 over the last 30, and HV60 over the last 60.
The chart above shows realized volatility for the same stock over four lookback windows: HV10, HV20, HV30, and HV60. It uses roughly a year of daily closing data, and each line shows the annualized historical volatility computed over that window. The shorter windows (HV10 in red) react faster to recent moves and swing more with each new day, so they look noisier; the longer windows (HV60 in purple) are smoother and only turn up or down after a move has persisted for weeks. The four lines move together, but the shorter ones lead and the longer one trails.
- Shorter windows react faster to recent moves but are noisier.
- Longer windows are smoother but lag behind recent changes.
HV tells you the past; it does not predict the future, but it provides a reference point for what is "normal" for a given stock.
3. Implied Volatility (IV): The Forward-Looking View
Implied volatility (IV) is the market's expectation of future volatility, backed out of option prices using a pricing model. If traders bid up option prices, IV rises.
- IV is forward-looking. It represents what options traders collectively expect the stock to do until expiration.
- IV varies by strike and expiry, forming a volatility surface. It tends to be elevated before known events (earnings, product launches).
- IV is quoted as an annualized percentage, so an IV of 30% means the market expects roughly a 30% annualized move.
The chart above shows the implied volatility series smoothed over four windows: IV10, IV20, IV30, and IV60 (the 10/20/30/60-day rolling averages of the daily ATM IV). It uses roughly a year of daily closing data. Just like HV, the shorter windows (IV10 in red) react faster to recent IV changes and bounce around more, while the longer windows (IV60 in purple) are smoother and lag behind recent shifts: because each window averages more days, the longer lines flatten the spikes and only turn after the recent IV move has persisted.
The gap between IV and HV is where the profit potential of many strategies lies: IV often overestimates future realized volatility (a phenomenon related to the volatility risk premium), which creates an edge for option sellers.
4. The Mean-Reversion Logic: Sell High IV, Buy Low IV
IV tends to revert toward its own average and toward HV over time. This creates two classic plays:
- High IV → options are expensive. Sellers can collect rich premium and buy it back later when IV (and premium) falls. Be careful: high IV usually means the market fears a big move (e.g., earnings).
- Low IV → options are cheap. Buyers can acquire exposure to a big move at a discount, expecting IV (and premium) to rise.
The chart above shows implied volatility (solid line) and 20-day historical volatility (dashed line) over roughly a year of daily closing data. The two lines move together, with IV usually sitting above HV20: when the gap widens, options are pricing in more movement than has recently been realized, and that gap tends to close over time as IV reverts toward HV.
A practical framework for the long-term trader:
| Situation | What it means | Typical bias |
|---|---|---|
| IV > HV, IV high vs its range | Options expensive | Favor selling premium |
| IV ≈ HV, IV mid-range | Options fairly priced | Neutral / both sides viable |
| IV < HV, IV low vs its range | Options cheap | Favor buying (if you expect a move) |
The next article (IV Percentile & IV Rank) shows how to measure "high" and "low" objectively.
⚠️ Platform Data Boundary: This article explains volatility concepts. The platform provides T-1 EOD closing IV and HV for every option and symbol, which is exactly what you need to apply this mean-reversion logic on a daily frequency: suitable for multi-day-to-multi-month research, not intraday volatility bursts.
⚠️ Research Use Only: This article is educational. Volatility edges are statistical, not guaranteed. Nothing here is a buy or sell signal. Use this platform's backtests as historical statistical reference only.