Historical Volatility

The volatility of a security over a period of time. Volatility is calculated with a mathematical method usually using the stock’s standard deviation, and is believed by some experts to be a measure of a security’s risk.

Historical volatility is essentially backwards looking and has little if any forecast ability. Long Term Capital Management used derivatives to take a short position on S&P 500 volatility, believing the long term historical volatility (15%) to be lower than the current market volatility (20%). However, turbulence hit the markets and volatiltiy didn’t dip below 20% for a long time.