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Volatility: Implied vs. Realized - Nov 9, 2018 | Market Measures
Tom and Tony discuss the relationship between implied and realized volatility and how options sellers profit from this relationship.
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      Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
      Market Measures

      Volatility: Implied vs. Realized

      Nov 9, 2018

      Implied volatility is a gauge of expected future movement taken from option prices and its imperfection of being over-stated relative to historical volatility is one-way option sellers’ can profit. This led the research team to ask, does the relationship between implied and realized volatility change across different levels?

      The Study:

      • Compared implied volatility to Realized Volatility via VIX versus RV on S&P 500 and Strangles on SPY when VIX:

      • Below 15, 15 to 20, 20 to 25, and Above 25

      • S&P 500 (SPY) and IV Index (VIX)

      • 2005 to Present

      Results:

      During all VIX thresholds, the implied volatility overstates the realized volatility, presenting a consistent advantage for option sellers. This is also reflected in the performance of short strangles which is consistently high probability trades no matter the level of volatility.

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