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?
Comparedto Realized Volatility via VIX versus RV on S&P 500 and 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
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.