Realised volatility, also called historical volatility, measures how much an underlying actually moved over a given window. It is computed from observed prices, usually daily closes, and expressed as an annualised percentage so it can be compared directly with implied volatility.
How it works
The standard method takes daily log returns, ln(price today / price yesterday), computes their standard deviation and annualises it: realised volatility = daily standard deviation × √252. Many desks assume a zero mean, which is also the convention in variance swaps, because the drift is negligible over short windows. The window matters: 10, 20 and 60 business days tell different stories. Other estimators use intraday data, or the open, high, low and close of each session, to extract more information from the same period.
Example
Hypothetical: over 20 trading days, a stock’s daily log returns have a standard deviation of 1.0%. Annualised realised volatility is 1.0% × √252, about 15.9%. If one-month options on the stock trade at 22% implied, the market is pricing more movement than the stock has recently delivered.
On the desk
Close-to-close numbers can miss what a hedger actually experiences. A stock that swings 3% intraday and closes flat shows low realised volatility, yet it generates real gamma P&L for anyone hedging during the session. One outsized day can also dominate a short window, so traders look at several horizons before drawing conclusions.
Educational definition. Worked examples are hypothetical. Not an offer or a recommendation.