The core comparison in volatility trading: what options are pricing against what the underlying actually delivers.
Implied volatility is a forecast embedded in a price; realised volatility is the outcome. The spread between them, measured over many trades rather than one, is the single most important statistic for anyone who systematically buys or sells options.
The spread is usually positive — implied above realised — which is the variance-risk-premium. It is not a free lunch: it is compensation for taking the losses that arrive in clusters, and the distribution of that edge is heavily skewed toward small wins and rare large losses.
Example: over the last two years XYZ 30-day implied volatility averaged 26% while subsequent 30-day realised volatility averaged 21%. Selling and hedging would have earned about five volatility points a month on average, with one month in that period that gave back most of a year.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.
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