Analyzing Historical Volatility for Options Trading
What is Historical Volatility?
It serves as a measure of how much the price of an underlying asset, such as a stock or a commodity, has deviated from its average price over a specific period in the past.
The calculation of historical volatility involves taking a standard deviation of daily returns, essentially quantifying the degree of variation from the average return. It's important to note that historical volatility is a backward-looking measure. This means it offers insight into the volatility that an underlying asset has exhibited in the past, but it does not predict the level of volatility that the asset might show in the future.
What is 30-Day IV-HV Difference?
30-Day Historical Volatility is a specific application of the broader concept of historical volatility. It looks at the price fluctuations of an underlying asset over the past 30 days, offering a snapshot of recent price volatility.
To calculate 30-day historical volatility, traders take the standard deviation of daily returns over the last 30 days for a particular asset. This offers insights into how much the asset's price has deviated from its mean price over the past month. However, similar to the broader concept of historical volatility, the 30-day historical volatility does not provide an indication of expected future volatility for the asset.
What is the 30-Day Historical Volatility Difference?
The 30-day historical volatility difference, often expressed as the IV-HV 30-Day Difference, compares the implied volatility (IV) of an asset with its historical volatility (HV). Implied volatility is a forward-looking metric, unlike the backward-looking nature of historical volatility. It serves as a measure of the market's expectations for the asset's future volatility, as inferred from the prices of the asset's options.
The formula for the 30-day IV-HV difference is quite simple: IV - HV. In the context of options trading, when the HV and IV are closely aligned, it generally implies that the options premiums are fairly valued, based on historical norms. The greater the IV-HV 30-day difference, the larger the discrepancy between expected future volatility (as represented by IV) and past volatility (as represented by HV).
Traders often use these differences to identify potential trading opportunities. A high IV-HV difference may suggest that options premiums are overvalued, meaning the market expects higher volatility than what has been observed historically.
Conversely, a low IV-HV difference may indicate that options premiums are undervalued, suggesting that the market expects less volatility than what has been the case in the past. This information can be instrumental in shaping trading strategies.
How to Add Historical Volatility to Your tastytrade Chart
As our preferred platform, we will show you how to add historical volatility to your chart on the tastytrade platform. To add historical volatility to your tastytrade chart, follow these steps:
1- Open a stock on the chart
2- Click the indicator button at the top left
3- Type H-L Volatility into the search bar
4- Click H-L Volatility, then add selected
H-L Volatility on tastytrade Chart
How to View 30-Day Historical Volatility on tastytrade
You can add 30-Day historical volatility to your tastytrade watchlists following these steps:
1- Open one of the watchlists on tastytrade (left-hand side or the watchlist tab)
2- Click the gear icon
3- Find HV 30d Chg and click to add it to the displayed list
HV 30d Chg & IV HV Diff on Tastytrade
How to View 30-Day IV-HV Difference on tastytrade
You can add 30-Day IV-HV Difference to your tastytrade watchlists following these steps:
1- Open one of the watchlists on tastytrade (left-hand side or the watchlist tab)
2- Click the gear icon
3- Find IV-HV 30d Diff and click to add it to the displayed list
tastytrade Disclosure
tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Marketing Agent (“HaiKhuu LLC.”) whereby tastytrade pays compensation to HaiKhuu LLC. to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of HaiKhuu LLC. by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of HaiKhuu LLC. or this website. tastytrade does not warrant the accuracy or content of the products or services offered by HaiKhuu LLC. or this website. HaiKhuu LLC. is independent and is not an affiliate of tastytrade.
tastytrade was previously known as tastyworks, Inc.
