tastytraders know that implied volatility tends to overstate realized volatility.
In this segment Frank puts context around this overstatement by exploring conditions of high implied volatility with those of low. The long run average implied volatility is somewhere around 16, what happens to the underlying price and option selling strategies when the VIX increases beyond this long-term value?
In general, we find that higher implied volatility does result in larger movements in the underlying product, however this is accompanied by larger expected ranges and option prices which expand at a larger proportion.
These expansions tend to have a position impact on short premium strategies resulting in higher win rates and a greater trade credit.