It's simple: compare the 30 day implied volatility to the 20 day historical volatility to get a rough idea of whether vol is a buy or sale.
In $SPX options, we often see a healthy premium relative to the actual volatility as investors are willing to pay up just a little bit more for protection.
But because of the price action in August, we're seeing a whole new animal.
The chart below shows the current 20-day HV readings (blue) compared to the 30-day IV readings (red). Credit goes to LiveVol.
Because of the extraordinary volatility seen over the past month, the current implieds are nowhere close to what the HV readings are showing us.
And this is why it's so important to understand the mechanics of the options market.
We can't look at this relationship in a vacuum. Implied volatility will tell us what the market is expecting in the future; it will sometimes use the past as a reference but the market was so unusual in August that many aren't expecting a repeat anytime soon.
My feel right here is that as we head into Labor Day weekend and the lazy fund manager jets off to the Hamptons, actual volatility will continue to draw down, as will premiums currently available in equity options. Trades that look decent here are covered calls, iron condors, and bear call spread hedges.
Want to learn more about implied volatility and how to use it in your trading? Check out OptionFu which will explain that and much more!