Traders make use of historical volatility to estimate the future movement, but there is a chance that the future volatility could deviate from the expected value as the factors influencing the price could change. Major fundamental changes could cause the asset price to stray away from the expected historical volatility.
Interpretation of Historical Volatility
- Historical Volatility does not measure direction; it just measures how much the securities price is deviating from its average.
- When a security’s Historical Volatility is rising, or higher than normal, it means prices are moving up and down farther/more quickly than usual and is a sign that something is likely to happen, or has already happened, regarding the underlying security
- When a security’s Historical Volatility is falling, it implies that the uncertainty regarding the security has reduced and things are returning back to usual.
|Historical Volatility of Active Stocks|
All the above 5 stocks have witnessed a big spike in their Historical & Implied volatility levels which have lead to an increase in the option premiums. As the volatility levels breach their average volatility levels, further capitulation in the underlying prices can be expected going forward. We expect all the above-mentioned stocks to remain volatile in the short-term and continue to trade with a negative bias going forward.