What's the implied Volatility?

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)?

• Answer:

  HV measures past price movements while IV measures expected prices by means of estimates. Learning these two can actually help traders in knowing when and how to invest, thus gaining more profits. One of the most common types of HV is Statistical Volatility, where underlying assets and its value are determined over a definite period or number of days. 'Finite and Adjustable'- these are what SV naturally means, as time averages and momentum regarding options are being considered. As for IV or Implied Volatility, price movements are further identified using varied estimates. Meaning, these estimates refer to the expectations of market traders themselves. The so-called 'bid-ask' estimates are also considered in IV, where buyers and sellers may impact the value of said underlying assets.