Standard Deviation and Historical
Volatility
When standard deviation is used in the context of historical volatility, it is
annualized to state what the one-year volatility would be. Historical
volatility is the annualized standard deviation of daily returns. This means
that if a stock is trading at $100 a share and its historical volatility is 10
percent, then about 68 percent of the occurrences (closing prices) are
expected to fall between $90 and $110 during a one-year period (based on
recent past performance).
Simply put, historical volatility shows how volatile a stock has been
based on price movements that have occurred in the past. Although option
traders may study HV to make informed decisions as to the value of options
traded on a stock, it is not a direct function of option prices. For this, we
must look to implied volatility.