Question

can someone give me a brief analysis of the relationships between historical volatility and implied volatility please?

Answer 1

Historical volatility is based on the historical price changes of an underlying stock over a certain time period. It shows historical price fluctuation into stock. Implied volatility is based on the changes in option premium and shows expected future volatility of the underline stock. The relationships between historical volatility and implied volatility are not simple as many factors contribute into it. If historical volatility and implied volatility shows similar figure; that means the option premiums of underlying stocks is fairly valued based on historical data of the stock. But if historical volatility is higher than implied volatility; it shows that option premiums of underlying stocks is undervalued based on historical data of the stock and if historical volatility is lower than implied volatility then it shows that option premiums of underlying stocks is overvalued based on historical data of the stock.