Implied volatility vs historical volatility
I mean if you knew in advance that historical volatility will sit at 5 for the next month, then yes, selling SPY options at 15 volatility sounds like a great idea. The point is though one looks backward (HV) and the other estimates forward (IV). An HV of 5 is unsustainably low, it suggest 2/3 of all days will see a .3% range or less in SPY. The HV numbers we see now look back at an incredibly non-volatile holiday stretch. Options rightly price in that we won't see that kind of non-action going forward.
For an extreme example of how HV and IV can diverge, consider a small binary-ish biotech ahead of news on some product. The stock itself may have tiny volatility, while options price in that the stock will double or halve once the news comes out. The attached graph shows DNDN over the past year, 20 day HV vs. 30 day IV. In late April ahead of news, IV sat at 140, HV at 30. After the news and the 30% gap, HV shot up to 110, and IV plunged to 60. The news was out. And no one would suggest options were a major buy at 60 volatility, other than a bot that would pick them up as cheap vs. historical volatility.
-- Adam / Daily