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for simplicity let s assume we have monthly stock closing prices of 1 through 10 for example month one is 1 month two is 2 and so on to calculate variance follow the five steps below next take the square root of the variance to get the standard deviation this equals 2 87 this is a measure of risk and shows how values are spread out around the average price it gives traders an idea of how far the price may deviate from the average sabrina jiang investopediaif prices are randomly sampled from a normal distribution then about 68 of all data values will fall within one standard deviation ninety five percent of data values will fall within two standard deviations 2 2 87 in our example and 99 7 of all values will fall within three standard deviations 3 2 87 in this case the values of 1 to 10 are not randomly distributed on a bell curve rather they are uniformly distributed therefore the expected 68 95 99 7 percentages do not hold despite this limitation traders frequently use standard deviation as price returns data sets often resemble more of a normal bell curve distribution than in the given example the volatility of stock prices is thought to be mean reverting meaning that periods of high volatility often moderate and periods of low volatility pick up fluctuating around some long term mean types of volatilityimplied volatility iv also known as projected volatility is one of the most important metrics for options traders as the name suggests it allows them to make a determination of just how volatile the market will be going forward this concept also gives traders a way to calculate probability one important point to note is that it isn t considered science and therefore does not forecast how the market will move in the future unlike historical volatility implied volatility comes from the price of an option itself and represents volatility expectations for the future because it is implied traders cannot use past performance as an indicator of future performance instead they have to estimate the potential of the option in the market 3implied volatility is a key feature of options trading also referred to as statistical volatility historical volatility hv gauges the fluctuations of underlying securities by measuring price changes over predetermined time periods it is the less prevalent metric compared with implied volatility because it isn t forward looking 4