A Tale of Two Volatilities


Because I know it can be confusing it is good from time to time to explain the differences between realized volatility and implied volatility. In essence volatility is a measure of dispersion (how far the returns are spread from a mean) so there should be only one volatility, however in financial markets we have a bunch of them. But for all practical purposes we have the following two:

1. Realized Volatility: Is the actual volatility of the market on any given time frame. It can be computed right away from just historical data. It is a reflection of what has already passed.

2. Implied Volatility: For this discussion you can think about implied volatility as the expectations of the volatility market about future volatility. It hasn't happened it is just an expectation and it is reflected in option prices.

So for today for instance, we have a day with high Implied Volatility (vol market for some reason continues pricing some kind of major event/crash) while realized volatility is actually very low and becoming even lower.

Leo Valencia hosts the Gamma Optimizer options service at ElliottWaveTrader.net.


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