Implied vs Realized Volatility: What Each One Measures

"Volatility" is one word doing two jobs. When an options trader says a stock's volatility is 30%, they usually mean a number backed out of option prices. When a chartist says the same thing, they mean a number computed from the stock's own recent moves. The first is implied volatility. The second is realized volatility. They are measured in the same units, they are often close, and they are not the same quantity — and which one sits underneath an indicator changes what the indicator can honestly claim. This entry stays close to definitions: what each number is made from, why they can disagree, and which of the two a band on a chart is built from.

Implied volatility: a price, read backwards

Implied volatility does not come from the underlying at all; it comes from the market for options on it. An option's price depends on several known things — strike, time to expiry, the current stock price, interest rates — and one unknown: how much the market expects the stock to move before expiry. Take the option's traded price, hold the known inputs fixed, and solve for the unknown. The volatility that makes the pricing formula agree with the market price is the implied volatility.

Three properties follow from that construction. It is forward-looking: it describes the movement being priced for a future window ending at expiry. It is a market price, not a measurement: it reflects what buyers and sellers of options were willing to pay, including whatever demand for protection they carried at the time. And it exists only where a liquid options market exists. A stock with no listed options, a small-cap with thin ones, and most of the tickers on a typical watchlist have no implied volatility to read.

Realized volatility: a measurement of what happened

Realized volatility is computed from the underlying itself. Take a series of closing prices, convert them to returns — the percentage change from one close to the next — and measure how spread out those returns were over some window. The spread is the standard deviation, and the standard deviation of recent returns is the realized volatility. A plain-English walkthrough of that yardstick is in is this price move normal.

It is backward-looking by definition: it describes movement that already occurred, over a window a person chose. It requires nothing but a series of closes, so it exists for every instrument on a chart, at every timeframe. And it is a measurement, not a price: nobody's willingness to pay enters the calculation.

Two naming points cause confusion. "Historical volatility" and "realized volatility" are the same thing — one emphasises the data source, the other the fact that the moves were realized rather than expected. And "rolling volatility" is realized volatility recomputed each bar over a moving window; how that window works is the subject of what is rolling volatility.

Why the two numbers disagree

The gap exists because the two numbers are made from different things. Realized volatility is arithmetic on a price series. Implied volatility is a price, and prices carry more than expectations: the cost of insuring a portfolio, the supply of people willing to sell that insurance, the pull of an upcoming earnings date or central-bank meeting that a backward-looking window cannot see. An options market can re-price the next month in an afternoon; a 60-bar window of closes needs sixty bars to fully turn over.

It is commonly stated in options education that implied volatility has tended to sit above realized volatility on average. That may be so; it is not something Oisigma has tested or published, and it is not a claim this article makes. What can be said without any research is structural: one quantity is a forecast embedded in a price, the other is a measurement of the past, and no mechanism forces them to agree.

Which one a band on a chart uses

Every volatility band on a chart is built from one of the two, and the choice is rarely stated in the indicator's description.

Options-derived "expected move" tools use implied volatility: they project the range the options market was pricing for a fixed window onto the chart. That is a legitimate object with a specific meaning, and its comparison to a statistical band is set out in the calibrated expected-range indicator explainer.

Our own band uses realized volatility, and only realized volatility. The Behavioral Transform Model reads a rolling window of recent close-to-close returns — the canonical window is 60 bars — and projects an expected range from the prior close; it takes no options data, no volatility index and no input from any market other than the one on the chart. The four-step construction is on the How It Works page.

That choice has a consequence for what can be checked. A range built from realized volatility makes a testable claim about the same price series it was computed from: a stated fraction of next closes should have landed inside. In the working paper, on daily closes across the instruments tested, the inner band contained the next close about 71% of the time historically and the outer band about 94%; the tables are on the Proof page. Past behavior is not a guarantee of future results. Because the input is any series of closes, the same check was run on bond futures and cryptocurrencies on the same terms as on an index with a deep options market — something a band built on implied volatility cannot offer for instruments that have no options.

Where the two meet in our published work

Implied volatility appears in our research in exactly one place, and it illustrates the difference well.

The working paper needed an independent way to mark days when a fast volatility shock was arriving, without using the band's own inputs to define them. It used the VIX — an implied-volatility index built from S&P 500 option prices. On days when it closed above 30, inner-band containment fell to about 65% historically, against about 71% overall; the mechanism, a backward-looking window still describing the calmer market of a few weeks earlier, is the subject of when volatility bands fail. The point here is what the two quantities were doing on those days: the options market had already re-priced, and the realized-volatility window had not yet caught up. That is the disagreement between implied and realized volatility, observed on the dates when it matters most.

What neither number tells you

Both are statements about the size of movement, not its direction. A high implied volatility says the options market was pricing large moves; it says nothing about which way. A high realized volatility says large moves occurred; likewise. Some traders use a realized-volatility range to judge whether a close was ordinary or unusual for recent conditions, and some compare an implied figure to a realized one to judge whether options looked rich or cheap. Both are descriptions of context. The working paper validates the calibration of the range — how often the next close landed inside it historically — not the profitability of any use built on it; whether any such use delivers value after costs is an open question.

The takeaway

Implied volatility is a price: what the options market was willing to pay for movement over a future window, available only where options trade. Realized volatility is a measurement: how much the underlying actually moved over a window somebody chose, available for any series of closes. They can disagree for structural reasons, and the size and sign of that gap is a question we have not studied. A band on a chart is built from one or the other; ours is built from realized volatility alone, which is what makes its coverage claim checkable on the same chart it is drawn on.

Frequently asked questions

Is implied volatility usually higher than realized volatility? Options education commonly states that it has tended to be, on average, and describes the difference as a premium paid to option sellers for bearing risk. Oisigma has not tested that claim and takes no position on it; nothing in our published work measures implied volatility against realized outcomes. What is structural rather than empirical is that the two are made from different inputs and nothing forces them to match on any given day.

Is the VIX implied or realized volatility? Implied. The VIX is computed from the prices of S&P 500 index options and expresses the movement the options market was pricing for roughly the next thirty days, in annualized percentage terms. It is not a measurement of how much the S&P 500 actually moved. In our working paper it served only as an external marker for crisis-onset days, not as an input to the band.

Can implied volatility be used on a stock or crypto asset with no options? Not directly. Implied volatility is solved from option prices, so where there are no traded options there is nothing to solve from; some tools borrow a volatility index from a related market as a proxy, which is an approximation rather than that asset's implied volatility. Realized volatility has no such constraint — any instrument with a series of closes has one — which is why a band built from it can be drawn, and its coverage measured, on the same terms across asset classes.

Does higher implied volatility mean price will move more? It means the options market was pricing larger moves for the window in question. Whether the underlying then moved that much is precisely the implied-versus-realized gap, and it is settled only after the fact. Neither figure carries information about direction, and neither is a forecast that a chart can be held to in advance; a realized-volatility range, by contrast, makes a claim that can be scored bar by bar against the closes it was drawn on.

Definitions are easier to hold onto once the objects are on a chart. BTM draws a range from realized volatility alone on any TradingView symbol — no options data required — and you can start a free 30-day trial to watch the estimate update on the markets you already follow.