Options mechanics
What is Historical Volatility (HV) and how do I trade the divergence between IV and HV?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
Historical volatility (HV) measures the actual realized price fluctuation of the underlying over a past period, calculated from closing price standard deviation, contrasted against implied volatility's forward estimate.
How it works
Traders compare IV to HV to gauge whether options are relatively expensive or cheap; IV trading well above HV can signal elevated premium levels priced for anticipated events.
An example
If XYZ's 30-day HV is 25% but IV is 45% ahead of earnings, the premium reflects an expectation of a bigger move than recently observed historical behavior.
Risk & limitations
IV versus HV divergence does not guarantee convergence on any specific timeline, and realized volatility can also spike unexpectedly, invalidating a simple reversion assumption.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.