Market Measures

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Implied vs. Realized Volatility

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The fact that implied volatility generally overstates the realized volatility encourages us to sell rather than buy premium.

Take SPY for example, its daily 30-day implied volatility is averagely 3 points higher than its daily 30-day realized volatility since 2005.

Implied volatility is a measure of future price movement of underlying while realized volatility measures the historical price movement.

Implied volatility overstating realized volatility means that option market expects higher underlying volatility and is overpriced on average, which encourages us to sell premium.

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