by Anna Fischer

Question by Brandon J:

How is historical volatility useful when trading stock options?

I guess my real question is: how is historical volatility useful in combination with implied volatility?

I realize that implied volatility is important in determining whether or not options are over-priced or under-priced.

When I calculate the implied volatility of an option, do I then need to compare it to the option's historical volatility OR do I need to compare the option's implied volatility to what the implied volatility has historically been for that option (thereby not using historical volatility rather historical values of implied volatility)?




Best answer:

Answer by James
Comparing implied volatility with historical volatility gives you an indication of whether extrinsic value is abnormally high. Some of these situations may be the run up to earnings release.

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