Implied vs Realized Volatility
What It Is
This comparison explains the difference between implied volatility (market expectations) and realized volatility (actual historical movement).
Why It Matters
The relationship between the two drives many options strategies and volatility trades.
How It Works
Implied Volatility (IV)
- Derived from option prices
- Reflects expected future volatility
- Influenced by supply, demand, and sentiment
Realized Volatility (RV)
- Calculated from past price data
- Measures actual movement
- Used to evaluate IV accuracy
Key Components
- Forecast vs history
- Volatility premium
- Market expectations
- Pricing efficiency
Example
If IV is high but RV is low, options may be overpriced relative to actual movement.
Key Takeaways
- IV predicts; RV measures.
- The gap creates trading opportunities.
- Many strategies exploit IV > RV conditions.