Volatility tells us how fast a stock changes in price. Volatility itself is not going to tell us which direction prices are going to move. Faster moving stocks, either up or down, have higher volatility, slower moving stocks have lower volatility.
There are two types of volatility that are important to know. Historical Volatility or HV is telling us about past price movements during a certain period of time. HV is the annualized standard deviation of past stock price movements. There is statistical formula which gives us Historical volatility. It can be calculated for the past 10, 20, 30, 60, 90 or any number of days. It helps to compare shorter term HV with longer term HV. This will tell us recent price movements.
Implied Volatility on the other hand is not calculated from past data, it is the option market’s prediction about future price movement. Implied Volatility constantly changes and that affects option prices. With increased Implied Volatility both calls and puts get more expensive. Implied Volatility indicates a one standard deviation move over a course of a year expressed as a percentage of the stock price. If a stock is currently trading at $50.00 and IV, the Implied Volatility is 40% than the one standard deviation move would be + or - $20.00 over the next 12 months.
Historical and Implies Volatility are constantly change and most of the time they are different. They move apart and at some point they converge.
Volatility Charts show the movement of Historical and Implied Volatility. The one thing we can notice from volatility charts is that volatility moves in a range. Volatility is not trending for a long period of time unlike most stocks do. When Implied Volatility is in the lower range options tend to be cheap and in the upper range they are expensive.
Below is the Volatility Chart for SPY. Although Historical Volatility is still low, Implied Volatility is moving higher. Option traders are expecting a bigger price movement for SPY, or the S&P 500. There is also a chart included so you can compare volatility movements with price movements during the same period of time.