Realized vs. Implied Volatility

Realized volatility measures how much the underlying actually moved over a past window; implied volatility is what options currently price for future movement. The spread between them - implied usually sits above realized - is the volatility risk premium, and its widening or collapse is one of the cleanest regime signals in options markets.

Realized (historical) volatility is computed from actual returns; implied volatility is backed out of option prices. They answer different questions - what happened versus what is being paid for - and comparing them tells you whether optionality is rich or cheap relative to how the market is actually behaving.

Implied typically exceeds realized because option sellers demand compensation for gap and tail risk they absorb. That persistent spread - the volatility risk premium - funds systematic option-selling strategies and, through the hedging of those positions, feeds the long-gamma pinning regimes that compress quiet markets further.

The reversal is the tell: when realized volatility rises above implied, options underpriced the movement - short-volatility positions bleed, hedging flips from dampening to chasing, and the entire volatility surface tends to reprice. Compression phases (realized far below implied at new highs) and their violent unwinds are the recurring cycle our research tracks.