Options Selling Edge: Is Implied Volatility Lying to You?

uh we can pull up some slides. We're going to be talking about the edge that keeps paying implied versus realized volatility. It's really like the core of premium trading like premium selling I should say is this idea of implied volatility overstatement. So we're going to dive into it. Talk about how that implied volatility overstatement has been holding up. This is from God if you want to give him a follow over on X. Really great piece. I think it's a great fundamental piece um refreshing this idea about implied volatility overstating realized um volatility historically and when that relationship becomes a little bit more strained. So that's what we're going to be talking about. Make sense? >> Perfect. Yeah. Timely too. >> Timely too, right? Okay, let's get into it. Okay, so talk about the study. So we're doing um SPY from uh 2016 to August of 2026. So about 10 years. We're looking at the 30-day implied versus the 30-day realized volatility on that underlying. We're going to take IV from the source feed, RV from the closes. Um, and then we're also going to be splitting out specific um, chunks of time to see like how that might relationship might change during different volatility regimes. Um, so what we're measuring here is that IVRV overstatement. And then also we're going to be using IV rank to kind of use a be a proxy um, for relative volatility, you know, being high or low. We're going to be using IV rank for that. And as we know, IV rank can be sensitive regardless of where the absolute VIX is actually at, right? The VIX could be at 18, but your IV rank could be high depending on what the year has been like. So, we're going to be using IV rank to understand that regime. And then we're going to be looking at like basically what that buffer between IV and HV looks like and how that kind of changes. And then does ball routine kind of change that edge. Make sense? >> Cool beans. Let's get into it. Okay. So, implied volatility is basically is a price for risk and then realized is the outcome and then across 10 years that price ran consistently high. basically this built-in cushion um that has only actually widened in 2026. So this cushion for people who are selling premium to kind of like offset that sort of like unlikely tail risk that you know the counter piece to that is you know this in very consistent implied volatility overstatement which kind of generates or is used as the basis for generating those smaller consistent profits over time. And what we can see is that when we looking at 2016 to 2026 and then 2020 to 2026 and then 2026 year to date, we can really look at that gap between that implied V and realized V and see where that gap tends to be widest. And it's actually been widest in 2026 year to date, which I found particularly interesting because V has not been I would say like nearly as dynamic as it was between 2020 and 2026. So we saw from 2016 from the full range like definitely an increase postcoid, but it's actually been higher now. when we're looking at that differential really between implied vault and realized vault for spy. >> Yeah, >> that was pretty interesting. >> And I think that's reflected in our our MEES and MQ positions. We've been selling premium neutral to bullish the whole year. We haven't really gone anywhere. I mean, it's like we've gone somewhere, but it hasn't felt like we've really gone anywhere. When you look at beginning of the year to now, um we're only up like 600 points in the in me. You know, I will say though, it I at first you might think that it might maybe I would have thought that too, but when you really think about it, >> realize V was I mean things moved a whole heck of a lot in 2026 and I think that's why that that makes sense. I mean when you think about the moves that actually happened in some of these names, >> it was crazy. Yeah, the individual moves on the individual days. I think like there were definitely some days where we saw some really large realized volatility um on sort of like a daily basis, but not I would say like the sustained like not not a 2020 um not even like a 2008 where you have like sustained periods of very high volatility. And remember when we're talking about like this overstatement um we're looking at kind of like aggregate days. So even though you do have like those couple of one I don't want to say couple of one-off days because we've had a couple of those for sure. Um but it's definitely not the same as having the sustained like a bare market for example um or just a very dramatic very volatile sell-off that lasts for several weeks or even months. >> Yeah. >> So important nuance to realize there um and then when we go to the next slide um we can talk about how often I beats realized volatility again for spy looking at 2016 to 2026 like the full range and then comparing that to 2020 versus 2026 postcoid and then 2026 year to date. And we can see just really how often that IV overstatement actually happens. 84, 85, and then 88% of the time. So really heavily fa favoring, right? Like this IV overstatement. But the downside to this, right, is that those tails when that IV overstatement doesn't happen and historical volatility really overshoots implied volatility. The size and the velocity of those moves can be quite big. So that's that kind of downside. profit often with the tail risk exposure or a profit less often with that potential upside or those two sides of the same premium selling or buying coin. Yeah. And I think this is uh something to consider like we'll always have even in the lowest of IV scenarios, you're you're still going to have uh a little bit of IV premium uh relative to realized. And you you definitely see that in the near-term cycles relative to long-term. Like the easiest way to describe it is like if you have a 10day cycle >> and you look at a 30-day cycle, the implied volatility is not linear. Like the the 10day cycle is not one-third the expected move of the 30-day cycle. It's always higher than that, which tells you that the implied volatility is is over overstated or more priced into the near-term cycle than some of these longer term cycles. And that's kind of where we're living. >> Yeah. And I think for that reason a lot of people a lot of ball people like to look at um the um risk premium implied volume risk premium difference between a lot of times they'll look at VIX which is a 30-day forward-looking measure and then historical V 30 days backward looking at the difference between those two to see how crazy high implied V is over near term right and then they look okay if it's really high then that's a fairly good selling opportunity. If not, h then you're just not looking to sell a whole lot, >> right? And using like you said a couple different metrics to kind of if you have like one metric that's pointing to some conclusion, right? There's always some bias in that metric, right? Like we know like IVR for example, if you have one big move, one big ball spike throughout the year that skews that range for the amount of time that that big move is contained within it, right? So like that can skew IVR to understate or maybe like overstate relative volatility levels. So, we know that there's like always a little bit of um bias with every single metric. So, using a couple of different indicators and having them all point towards one consensus is like usually a good sign and a good strategy. It helps make that a higher conviction trade. And then when we go to the next slide, so this is kind of related to what we're talking about. So, now we're breaking this down by volatility regime. Um so, we're doing IVR below 30 and then IVR above 30. Um and what we're comparing basically here is that IV overstatement using medians which kind of give you a typical representation of what you would normally see from IV overstatement then doing that against averages which includes the tails. So averages are much more sensitive to those tails and you can really see that show up more in that IV being elevated regime. So that IV over 30 regime, you can really see the difference here between that median and that average, which is really just from those periods like we talked about where like just those really one-off, not one-off, but like those odd occurrences when the market undergoes serious sustained volatility, which can really drag down that IV overstatement um you know, amount really because you'll just have periods when historical volatility just overshoots implied volatility significantly and then Ivy usually corrects pretty quickly, but those occurrences are enough to bring down um those sort of the you know that overstatement degree that overstatement magnitude I should say um in elevated volatility. >> Yeah, I think that for me this one is more like uh another way to think about it is like when you look at an earnings announcement and the expected move is 15% of the stock price like what is the actual probability that there's a three standard deviation move which is resulting in you know a 50% move in the stock price. It's a pretty low. So like the higher IV rank gets for the S&P 500 that is reflective of the actual implied volatility. It's the same thing like how much of a movement do we actually need to get a one standard deviation move, two standard deviation move. And when the IV is really high, the actual move that is required to get those multiples is super high. And it just that's where I think the overstatement really comes into play. >> Right. Yeah. Exactly. Um, so I thought this was very interesting. It really just shows again like what those what those tail occurrences can really do and how that can impact. Although like we kind of said when Ivy is elevated your premiums do become a lot richer and IV usually adjusts pretty quickly because remember that we're capturing range. So whether we're having like serious momentum you know to the downside and then a rebound um it's really the range right that we're trying to capture when we're talking about volatility. And typically what we see is that IV the market usually catches on pretty quickly when the market starts to tumble. Um and that's reflected in that implied volatility. And then when we go to the next slide, this is now just comparing it across different years. We can actually see that the cushion is what we're calling it here is actually the fattest in the kind of calm years. So when the market might have like some VIX pops, but definitely not to the same degree as like 2020 or 2022. That's actually where we're seeing that differential when we're looking at IV minus HV on an average scale be um I would say like the juiciest and then that's, you know, part of why even though we've had some big moves, part of why 2026 has yielded um some nice differences there. >> Yeah. >> Yeah. >> I like it. And yeah, this this is again uh it's been a great year for neutral to bullish premium selling in MES and MNQ, our vehicles of choice. Um, and I think this is reflective of that for sure. >> Cool. Let's go to the next slide. So, um, just a nice little snapshot of kind of like what we're talking about when it comes to 2026. So, the cushion in 2026 has been particularly high when we're looking at this IV minus HV. So, this IV overstatement, basically, how well um, sort of like the options market has done uh, in pricing in realized volatility. We've seen that cushion be quite high in 2026. Um we're at about an 88% IV overstatement rate. Um we're in a relatively calm regime right now, although we've certainly seen pops out of that throughout the year, but relative VIX levels have stayed somewhat reasonable this year. So it's fairly calm regime that we've seen so far, even though it's certainly some big moves. And then like you said, Mikey, that's part of why 2026 can be paying um so well, especially for some of those neutral strategies um during especially the areas of chop, right? >> Cool. Let's get to some takeaways. So, just to kind of, you know, wrap everything up, IV structurally overstates realized um over the last 10 years, spies and volatility, implied volatility ran 3.18 points above realized fall on 84% of days. Um, which is that premium seller edge. I don't love the word edge, but it's really just a trade-off of risk where the premium seller can benefit most more often really from that overstatement and the compensation and that is the compensation for taking on that unlikely tail risk. So that edge is not fading. Um and 2026 is a standout. That cushion is actually especially high this year and the IV overstatement rate. Um and then higher IVR pays the richest, but mind the tail. We really saw it drag down that average overstatement rate not reflected in the medium medium median oh my goodness in that high volatility regime um sell it size for the tail and then trade the structure not the forecast you don't have to predict volatility IV actually does a pretty good job of doing that already um so just keeping the gap in mind depending on the volatility regime can be helpful and then IVR can be used as that indicator um to just yeah be mindful get like another little indication of volatility regime from that metric. So, I think that's all I got. >> Fantastic. Yeah, I mean I implied Vault versus historical vault. It's it's the bedrock of options trading. I mean, whether you're buying, whether you're selling. So, really great research. Uh, thanks, Julie. Good to see you.