Many participants notice that option selling strategies appear to work more consistently over time. One concept often discussed behind this is the idea of a volatility premium.
In simple terms, options are priced based on expected movement in the market, which is reflected through implied volatility (IV). However, actual market movement over time, known as realised volatility (RV), is often lower than what was initially expected.
This difference between expected and actual movement is sometimes referred to as the volatility premium.
For example:
• Implied Volatility (IV): 18%
• Realized Volatility (RV): 12%
• Difference: 6%
In such cases, option prices were based on higher expected movement, but the market moved less. This gap is where option sellers may benefit, as they collect premiums based on higher expectations.
This is why certain strategies are commonly observed:
• Short straddles
• Short strangles
• Covered option approaches
However, this does not mean the outcome is always favourable.
During periods of sudden or high volatility:
• Market movement can exceed expectations
• Realised volatility can rise sharply
• Risk can increase significantly for sellers
Because of this, many participants focus on:
• Position sizing and exposure
• Understanding changing volatility conditions
• Avoiding participation during extreme phases
• Managing overall risk rather than only returns
This creates an interesting perspective where outcomes depend not just on direction, but also on how expectations compare with actual movement.
Different experiences can offer useful insights into how traders understand and approach this concept.
What has been your observation? Do option sellers benefit from this difference over time?
