Long Volatility Intuitions Are Not Your Friend In absolute terms, equity implied volatility is as low here as it’s been for ages.
A naive reaction to a decline in implied volatility is to take a long volatility view by buying straddles, strangles, etc. on the expectation that implied volatility will revert to a higher long-term mean. But that’s an easy way to go broke as the market continues to drift, especially since implied volatility has carried a hefty premium to short-term realized volatility for many months now. To clarify: one-month historical volatility in the S&P 500 is around 7% annualized, while at-the-money April SPX options prices imply volatility in the range of 13-14%.
Mid-Day Update Why the Market is like Contra — Option 911 Blog.