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Market Measures

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The Chance of Being Overstated

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.

This segment of Market Measures looks at how often implied volatility (IV) overstates realized volatility (RV).

When IV overstates RV, the option implies an expected move (IV) that is larger than what occurs historically (RV).

In general, IV overstatement does not vary across implied volatility ranks (IVR), but average P/L does vary across IVR. IV overstates RV 83% of the time - this means volatility overstatement fails 17% of the time.

Therefore, risk and reward are consistent in varying IV environments, but the amount of money we stand to make increases with IV.

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