Implied volatility tells you what the options are pricing. Realized tells you what the market actually did. The ratio between them is one of the most useful dials on the board.
The ratio
Implied divided by realized. We show it on the front expiry, against 5, 10, and 20 day realized:
- Around 1: implied and realized agree.
- High (premium rich): options are pricing more than the market is delivering. Premium sellers get paid, and implied tends to mean-revert down.
- Low (premium cheap): the market is moving more than the options price. Implied tends to catch up and rise.
A normal band is roughly 0.8 to 1.5. Outside that is where the vol force gets loaded.
Why it feeds direction
Falling and rising implied vol are exactly what the vanna flip responds to. So the ratio is not just a premium gauge, it is the fuel gauge for the vanna lean:
- Rich premium draining (implied falling) lifts price above the vanna flip, bleeds it below.
- Cheap premium catching up (implied rising) sells above the flip, squeezes below.
The expected move
The same implied number sizes the day. We draw the one-session expected move as a band around spot. Realized usually comes in under implied, which is why selling premium is the base-rate edge, but the level of implied vol is the lever, not a constant.
The read
Check the ratio before you trust a directional lean. Normal means trade the structure. An extreme means the vol force is about to pick the direction.