Volatility

Historical Volatility Also referred to as statistical volatility. Historical volatility gauges the fluctuations of underlying securities by measuring price changes over predetermined periods of time. This calculation may be based on intraday changes but most often measures movements based on the change from one closing price to the next.

Not everyone agrees on how to calculate historical volatility. Do you measure the distance prices move from one close to the next close? Do you measure the distance prices move from one open to the next open; or the current close to the next open; or the current low to the next high (or vice-versa); or the distance from each bar's low to each bar's high and then average them over X number of bars? Etc.

Implied Volatility is the estimated volatility, or gyrations, of a security's price and is most commonly used when pricing options. In general, implied volatility increases while the market is bearish, when traders believe the asset's price will decline over time, and decreases when the market is bullish, when investors believe that the price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets. Implied volatility is a way of estimating the future fluctuations of a security's worth based on certain predictive factors.