Volatility Spikes: When Fear Overprices Options and Creates Opportunity

Volatility is the heartbeat of option pricing – when volatility expectations jump, option premiums jump with them​. A volatility spike usually means traders are scrambling for protection, bidding up the price of options (especially puts) to extreme levels. Essentially, investors caught in a fearful mindset become willing to pay almost any price for insurance on their portfolios. In such frenzied moments, implied volatility can overshoot reality: the options market’s forecast of future volatility becomes far higher than what actually ends up happening. And when implied volatility (IV) is higher than realized volatility, option sellers have an edge – they’re getting overpaid for the risk they take​. This is why veteran premium sellers often say, “sell vol(atility) when it’s high.” They know that once the panic subsides, IV will likely revert to the mean (a well-known tendency in volatility)​, and those overpriced options will rapidly lose value in the seller’s favor.