Historic Volatility is the volatility of an asset based on its past price movements. The volatility of the underlying asset for the option’s remaining life is a key input into most option pricing models, however this volatility is never in practice observable since it is based on future price movements which cannot be known. Thus, volatility must be forecast, and one method of forecast is to use the historic volatility of the asset which is calculated from its past price movements.
Typically, daily data is used and the standard deviation of the daily log of price movements is the volatility. If daily data is used then a daily volatility is the output from a calculation. For input into an option pricing model such as Black Scholes the annualized volatility is required. The annualized volatility is simply the daily volatility multiplied by the square root of the number of trading days in the year (typically 250 or 252 trading days in the year are assumed).
One issue to note is that the daily price series must be cleaned of any jumps due to dividend payments. When a stock trades ex-dividend its price will gap down by the approximate amount of the dividend and since this is a price drop not due to the natural volatility of the asset all dividends must be stripped out of the price series (normally by adding back the dividend payment amount on all the ex-dividend days).
Derivatives ONE features a Historic Volatility Calculator:
First enter the price series separated by either a comma or a line break:
Simply, click the Calculate Button and the daily and annualized volatility are calculated:
In addition, various statistics on the price series are available:
