Implied vs Realized Volatility: Reading the Gap
Options prices embed a forecast of volatility; history records what actually happened. What the difference between them measures and how to use it carefully.
Realized volatility looks backward: it is computed from returns that have already occurred. Implied volatility looks forward: it is the volatility input that, when plugged into an option-pricing model, reproduces the price at which an option trades. Comparing the two tells us how much movement the options market is paying for relative to what history suggests.
Figure 130-day realized volatility, annualized
Live dataThe volatility risk premium
Across equity, currency, and crypto options markets, implied volatility has on average tended to sit above the volatility later realized. The difference is usually interpreted as a risk premium: option sellers demand compensation for bearing the risk of large, sudden moves, and buyers are willing to pay for protection.
- Compare like with like: a 30-day implied volatility against volatility realized over the following 30 days, not the preceding 30.
- Use consistent annualization for both series.
- Expect the premium to turn negative around shocks, when realized volatility jumps above what was priced.
“Selling volatility earns the premium most of the time and gives much of it back in a few days.”
For risk managers the gap is most useful as context: an unusually low implied-to-realized ratio can indicate complacency, while an unusually high one shows the market paying up for protection.
This publication is provided for informational purposes only and does not constitute investment, legal, or tax advice, or an offer or solicitation to buy or sell any asset. Live figures are computed from third-party public market data and may be delayed, incomplete, or inaccurate.
