Historical volatility measures the actual price fluctuations of a security or market over a specified past period, typically expressed as an annualized percentage. This backward-looking metric calculates the standard deviation of price returns, providing insights into how much prices have moved relative to their average. Historical volatility serves as a baseline for comparing current market conditions and option pricing.

Traders use historical volatility to assess market regimes, calibrate risk models, and evaluate option pricing relative to actual price movements. Comparing current implied volatility to historical volatility helps identify potentially mispriced options. Historical volatility analysis considers different time periods and market conditions to understand typical and extreme market behavior patterns.

Real-world example: Tesla stock shows 60% historical volatility over the past year, indicating significant daily price swings that options traders use to assess whether current option premiums fairly reflect the stock’s typical price movement patterns.