Realized Volatility

The realized volatility is a measure of the average size of the returns offered by a security in a determined period. For example, a stock that falls or rises 30% in a few days is considered very volatile, and conversely a Treasury bond that moves 1% at most on a given week has low volatility.

Volatility by its nature is a range-bound measure on the low side, it can never go below 0. This allows traders to distinguish regimes of low volatility.

The more appropriate name for this measure would be “standard deviation of returns” but financial jargon

Volatility is used in two different settings at least:

• For security due diligence and structuring: stocks that have experienced a long spell of low volatility offer interesting opportunities ahead of catalysts that might make them more volatile. Usually, when realized volatility is low then so is the price of options
• For portfolio construction and risk budgeting: realized volatility (and its sibling measure VaR) are used to construct portfolios with specific risk/volatility targets