SPX Implied Volatility vs. Historical Volatility

Implied Volatility - Historical Volatility Study

This week's chart shows the implied volatility and the historical volatility of the SPX. The red line shows the 30-day implied volatility and the periwinkle line shows the 30-day historical volatility. Implied volatility has resided above historical volatility since July. This is a relationship that can't hold indefinitely. This implied volatility - historical volatility set up has been, in hindsight, a great trade for option sellers. If this implied volatility - historical volatility set up holds, it may usher back in a new reign for income trading.

Implied Volatility and Historical Volatility and Income Trading

If implied volatility remains above historical volatility and historical volatility remains low, it would be an ideal set up for income trades. It means that options would be priced too high ( implied volatility ) in terms of where the actual stock volatility is trading ( historical volatility ). If implied volatility stays above historical volatility, it will be good to be short options. Having negative vega would be beneficial in this environment because the implied volatility and historical volatility lines need to ultimately need to converge to prevent an arbitrage opportunity. The gamma-theta ratio is beneficial because traders get more time decay than historical volatility dictates they should.

Volatility Chart Source: LiveVol