Realized Volatility

What Is Realized Volatility?

Realized volatility (RV) measures the actual volatility of an asset over a historical period, calculated from price returns. It answers: how much did this asset actually move? The most common calculation: annualized standard deviation of daily log returns over a rolling window (typically 10, 20, 30, or 60 trading days).

Unlike implied volatility — which is forward-looking and derived from option prices — realized volatility is backward-looking and derived from price history. It’s a statement of fact about what happened, not a forecast.

The calculation: take daily logarithmic price changes over the window, compute the standard deviation, and annualize by multiplying by the square root of 252 (trading days per year). A 30-day RV of 20% means the asset moved consistently with 20% annualized volatility over the past 30 days. Comparing short-window RV (10-day) to long-window RV (60-day) reveals whether volatility is accelerating or decelerating.

Why It Matters for Options Traders

Realized volatility is the benchmark for option pricing. The core question: does the implied volatility priced into options accurately reflect the volatility the underlying will deliver? If an option is priced at 30% IV and the underlying only moves with 20% RV, the seller collected more premium than the risk warranted.

This comparison — IV versus RV — is fundamental to volatility trading. When IV exceeds recent RV, options appear expensive, favoring sellers. When RV exceeds IV, options appear cheap, favoring buyers. The difference is called the volatility spread or volatility risk premium.

Realized volatility also provides context for risk management. A 1% daily move in an asset with 20-day RV of 15% is unremarkable. The same move in an asset with 8% RV is an outlier. Knowing RV calibrates your expectation for normal versus abnormal movement.

Key Characteristics

• Backward-looking: Realized volatility measures what actually happened — it is historical by definition and cannot predict future movement
• Window-dependent: RV calculated over different periods (10-day, 30-day, 60-day) can diverge significantly — specify the window when quoting RV
• Annualized by convention: Multiply daily return standard deviation by the square root of 252 to express as an annualized figure comparable to IV
• Benchmark for IV: The comparison between current IV and recent RV is the primary tool for assessing whether options are cheap or expensive
• Regime-sensitive: Realized volatility clusters — low-RV periods tend to persist, as do high-RV periods — making recent RV a useful (imperfect) predictor
• Volume and gap sensitivity: Large single-day moves or overnight gaps can dominate the RV calculation depending on window length