Vol Regime Classification

Implied vs Historical Volatility

Implied volatility (IV) is the market's forward-looking expectation of how much a security will move, extracted from current options prices. Historical volatility (HV) — also called realized volatility — measures how much it has actually moved over a recent lookback period (typically 21 days).

The relationship between IV and HV is one of the most useful signals in options trading. When IV is high relative to HV, the market is pricing in more uncertainty than has recently been realized — options are expensive. When IV is low relative to HV, options are cheap relative to what's actually happening in price.

The four vol regimes

The IV/HV ratio can be classified into four states, each with different implications for market behavior and strategy:

• Suppressed (IV/HV < 0.75): Implied vol is significantly below realized vol. Options are genuinely cheap — the market is pricing in calm that isn't present in actual price behavior. Often a precursor to a vol expansion. Directional options buying is structurally attractive.
• Compressed (0.75–1.0): IV is moderately below HV. Options are somewhat underpriced. Transitions into this regime from suppressed often signal an impending normalization. Neutral to slightly favorable for options buyers.
• Normal (1.0–1.25): IV and HV are roughly in line. Options are fairly priced. No strong structural edge for buyers or sellers based on vol alone. Strategy selection should be driven by other factors (GEX, directional view, etc.).
• Elevated (IV/HV > 1.25): Implied vol is significantly above realized vol. Options are expensive — the market is pricing in more uncertainty than has been realized. Options selling strategies (credit spreads, short straddles/strangles) have a structural edge. Mean-reversion of IV is a persistent tendency.

Why regimes matter for strategy

The vol regime is not a directional signal — it doesn't tell you whether the market will go up or down. It tells you whether you're better positioned as an options buyer or seller, structurally:

• Suppressed/Compressed → buy options: Long calls, long puts, debit spreads, long straddles. You're paying below-average prices for convexity.
• Elevated → sell options: Credit spreads, iron condors, cash-secured puts, covered calls. You're collecting above-average premium for taking on defined risk.
• Normal → strategy-neutral: Vol alone doesn't give you an edge; focus on GEX and directional signals.

Vol regime transitions

The most actionable moments are regime transitions — when vol moves from one state to another. Moving from Suppressed to Normal often coincides with the beginning of a volatile period. Moving from Elevated to Normal signals vol crush is underway and options sellers' edge is diminishing.

Regime transitions combined with GEX context are particularly powerful. A vol regime shift from Suppressed to Normal during negative GEX is a warning sign of potentially violent directional movement. The same shift during strongly positive GEX is more likely to produce a controlled, contained move.

VIX as a reference

The VIX index (CBOE Volatility Index) represents the market's 30-day implied vol expectation for the S&P 500. It's the most widely followed vol measure. VIX above 20 generally corresponds to an elevated vol regime; VIX below 14 generally corresponds to suppressed or compressed. However, the IV/HV ratio is more precise than VIX alone because it compares implied vol to the actual recent realized environment rather than an absolute level.