Realized Volatility
Canonical definition, formula, interpretation, and API reference.
Definition
Actual stock movement over N days, annualized from log returns. The truth side of the VRP equation.
Formula
RV_n = stdev(log returns) x sqrt(252)
Standard deviation of daily log returns, annualized by sqrt(252 trading days).
Inputs
daily closing priceslookback period
Output
rv_5drv_10drv_20drv_30drv_60d
Interpretation
- RV > IV (negative VRP): danger zone for premium sellers
- RV < IV (positive VRP): edge for premium sellers
- Short lookbacks capture regime change; long lookbacks show baseline
API Reference
Endpoint
GET /v1/volatility/{symbol}
Tier
Growth+
Response field
realized_vol.rv_5d, rv_10d, rv_20d, rv_30d, rv_60d
Why Realized Volatility Matters for Trading
TL;DR
RV is what actually happened. The gap between IV (what the market expected) and RV (what occurred) is the VRP — the core short-vol edge.
- What it measures
- Annualised standard deviation of log returns over a historical window (5d, 10d, 20d, 30d, 60d).
- What it signals
- How volatile the underlying actually was. The ground truth IV is being compared to.
- Why we measure it
- Without RV, IV is unfalsifiable. The comparison is the entire vol trade.
- Who uses it
- Vol traders, risk managers, options PMs, volatility targeters.
How to read Realized Volatility
RV falling below IV
- VRP positive and widening
- Short premium harvest
- Iron condors win
- Calm-market regime
Good for: short vol, premium sellers
RV rising above IV
- VRP turns negative
- Short-vol losses accelerate
- Long vol outperforms
- Stress-regime onset
Bad for: short vol — good for: long straddles
RV ≈ IV
- Fair vol pricing
- No vol edge
- Trade direction or skew
- Typical between regimes
Fair
Rules of thumb
- Use multiple windows. Short RV (5d) is noisy; long RV (30d+) lags. Look at the curve, not a single point.
- Parkinson / Garman-Klass > close-to-close. Range-based estimators are more efficient but FlashAlpha reports close-to-close for simplicity.
- Weekends aren't in RV. Returns use trading days. Overnight risk is baked in, but calendar time is not.
- RV regime-shifts fast. Vol clusters — a low-RV week often follows one. A sudden jump signals a regime change.
- Pair with IV. IV without RV is meaningless. RV without IV is an accounting entry.
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