Implied vs. Historical Volatility
Historical volatility and implied volatility are two different measures of volatility, which is a measure of the degree of variation in an asset's price over time.
Historical volatility is a measure of the actual volatility of an asset's price over a certain period of time in the past. It is calculated by taking the standard deviation of the asset's returns over that period. Historical volatility can be used to assess the risk of an asset and can help traders and investors make decisions about whether to enter or exit a trade.
Implied volatility, on the other hand, is a measure of the market's expectation of an asset's future volatility, as implied by the prices of its options. It is calculated using an option pricing model, such as the Black-Scholes model, and is used to estimate the volatility that the market is pricing into the options. Implied volatility is a forward-looking measure, can be used to compare options with different expiration dates and strike prices, and can help traders and investors assess the potential risk and reward of different options trading strategies.
In summary, historical volatility looks backwards while implied volatility looks forward, they are both measures of volatility, but they are calculated differently and used for different purposes.
Historical volatility is a measure of the actual volatility of an asset's price over a certain period of time in the past. It is calculated by taking the standard deviation of the asset's returns over that period. Historical volatility can be used to assess the risk of an asset and can help traders and investors make decisions about whether to enter or exit a trade.
Implied volatility, on the other hand, is a measure of the market's expectation of an asset's future volatility, as implied by the prices of its options. It is calculated using an option pricing model, such as the Black-Scholes model, and is used to estimate the volatility that the market is pricing into the options. Implied volatility is a forward-looking measure, can be used to compare options with different expiration dates and strike prices, and can help traders and investors assess the potential risk and reward of different options trading strategies.
In summary, historical volatility looks backwards while implied volatility looks forward, they are both measures of volatility, but they are calculated differently and used for different purposes.
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