Volatility — are options expensive right now?

Volatility is the heart of the option, because an option is a bet on movement. This episode is about telling whether that bet is cheap or dear — the gap between what the market did and what it expects, why sellers carry an edge, and how to read the crypto vol thermometer.

What volatility is

Volatility measures how much, and how often, a price changes. In finance we usually express it as the standard deviation of returns, annualized, in percent. Intuitively: a utility stock plods along at maybe 15%, BTC typically runs 50–80%, and small-cap alts in a bull market can hit 100–200%+. Higher vol means more risk and more potential — one day on BTC can produce as much movement as half a year on a sleepy stock.

Here's why this matters for options: an option is essentially a bet on movement, so if the market prices in a big move, options are expensive; if it prices in a small one, they're cheap. But the market prices options on expectations, not history — which leads to the single most important distinction in the whole course.

Realized vs implied volatility

Mixing these two up is the classic beginner mistake. Realized volatility (RV) is how the price actually behaved in the past, computed from historical returns. Implied volatility (IV) is how much volatility the market is pricing in for the future, reverse-engineered from option prices.

Think of the surf. RV is flipping through a friend's vacation photos — you can see exactly how the waves broke on those days. Those are facts. IV is checking next week's surf forecast — "swell building, 4–6 feet, offshore winds." Those are expectations, and expectations cost money: the surf school charges more when a storm swell is in the forecast.

The relationship you actually trade is IV vs RV: when IV > RV the market prices in more volatility than has been happening — options are expensive; IV ≈ RV is fair; IV < RV means options are cheap relative to what's really going on. In practice IV usually runs higher than RV — and that's the whole reason selling options can be attractive. Example: BTC sits in a tight two-week range (RV 20%) but IV is 50% because the Fed meets in three days. The market knows a move is coming and prices it in.

The volatility risk premium

The volatility risk premium (VRP) is simply IV − RV. Historically, in most markets, IV runs systematically higher than the RV that actually shows up — by a few points on average. Example: BTC options price at IV 60%, realized vol over the next month turns out 50%, so VRP = 10 points.

Why does this happen? Because buyers want protection and will overpay for it — exactly like a sportsbook. A coin-flip game should be priced at 2.00, but the book offers 1.90; that gap is the house margin, your cost of a guaranteed payout structure. The book has no magic knowledge — it just systematically collects margin across thousands of bets. The options market is structurally identical: buyers overpay for protection, and sellers collect that margin for taking the risk.

This is the strategic foundation for a lot of professional approaches — premium-collecting structures like selling OTM puts, credit spreads, iron condors and short strangles. The edge logic: by systematically selling, you statistically profit because IV > RV on average. But three caveats matter. IV isn't always greater than RV — tail events happen. Option-selling has asymmetric payoffs: you win small often and lose big rarely, so without risk management one tail event can wipe out years of gains. And VRP is bigger in some markets (huge in BTC post-panic) than others.

DVOL — Bitcoin's thermometer

DVOL is a Bitcoin volatility index published by Deribit — functionally the crypto equivalent of the VIX. It's a 30-day annualized IV computed from active BTC options. DVOL rising means premiums are getting expensive and the market is afraid or expecting a move; DVOL falling means premiums are cheapening and the market is calming. In crypto it's the first thing you check before picking a strategy — your primary thermometer.

IV Rank & IV Percentile

You know high DVOL means expensive and low means cheap. But is DVOL 40 high or low? That needs context, and two metrics give it.

IV Rank

Where does current IV sit between its 52-week high and low?

IV Percentile

What percentage of days in the past year had lower IV than today? If IV was lower on 200 of the last 252 trading days, IV Percentile = 200 ÷ 252 × 100 = 79 — today's IV is higher than 79% of the year. IV Rank is sensitive to a single extreme spike distorting the range; IV Percentile looks at the whole distribution, so many traders trust it more. Both are available on Tastytrade, Thinkorswim, Laevitas and IBKR.

Where this leads

You can now answer the question this episode opened with — are options cheap or expensive right now — using RV, IV, the risk premium and DVOL context. Next we stay inside volatility but add the two dimensions that shape it: term structure (how IV changes across expiries) and skew (where the market pays up for fear), before moving into positioning and how dealers actually move price.