What is the difference between historical and implied volatility
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When it comes to trading, it is imperative to understand the concept of volatility. Volatility is the amount of variation of a price of a security over a particular time irrespective of the direction. It is also considered a measure of risk i.e., a security with higher volatility is deemed to be riskier i.e., it can undergo a considerable amount of change in price. But that is where the opportunity lies as well. There are two types of volatility i.e., historical volatility (HV) and implied volatility (IV).
Historical volatility of a security tells us about how volatile it has been in the past over a particular period i.e., it is backward looking. Importantly, HV can change based on the time period that we look into. For instance, HV of a stock in last one year and in last six months can be different say, 15 per cent and 10 per cent respectively. The inference is that the stock has turned less volatile of late. Importantly, this may not be a good indicator of future volatility.