A Historical Look at Volatility, And How Smart Options Traders Profit From It

A Historical Look at Volatility, And How Smart Options Traders Profit From It

"Volatility doesn’t arrive with a warning, it arrives with consequences."

For more than two decades, I’ve watched volatility cycle through its natural rhythms: calm periods of complacency, sharp spikes of fear, and long recoveries no one sees coming. But one thing never changes, volatility always comes back. And when it does, it transfers money from the reactive to the prepared.

At The Option Premium, our edge comes not from predicting volatility, but from understanding its history, respecting its power, and positioning with discipline.

Today, we’ll explore how volatility has behaved over the past 30 years, and more importantly, how options traders like you can profit from those cycles.

📉 Understanding the Cycles of Volatility

Since the VIX Index (CBOE Volatility Index) was launched in 1993, it’s been known as the market’s “fear gauge.” It doesn’t measure actual movement, it measures expected movement. Think of it as a trader’s barometer for pressure building under the surface.

Across decades, we’ve seen clear volatility regimes:

🔹 The Quiet Periods

• Mid-1990s, 2004-2006, 2017

• VIX hovered below 12, often under 10

• Realized volatility collapsed; markets trended smoothly

🔸 The Spikes

• 1998 LTCM, 2008 Financial Crisis, 2010 Flash Crash, 2015 Yuan Devaluation, 2020 COVID Crash

• VIX surged above 40, sometimes >80

• Realized vol spiked dramatically

🔄 The Transitions

• Most of the time, markets don’t live in extremes

• Volatility mean-reverts, but rarely gently

• Traders who adapt position sizing, hedge ratios, and strategy selection outperform by staying flexible

🧠 The Historical Lessons Most Traders Miss

Volatility isn’t random. It’s clustered. It’s cyclical. And it’s misunderstood.

Here’s what history teaches:

1. Low volatility leads to complacency

   • Traders size up, sell too much premium, ignore tail risk

   • This sets the stage for sudden repricing when vol spikes

2. Volatility spikes are short-lived but violent

   • Most VIX spikes only last 1-3 weeks

   • But they cause massive damage to uncovered positions

3. Volatility expansion = opportunity

   • Premiums inflate

   • IV rank surges

   • Theta becomes more favorable

4. Most of your edge comes after the storm

   • When volatility spikes then starts to decline, that’s when premium-selling gets its best setup

   • Smart traders re-enter, not retreat

What Is the VIX Seismograph?

Just like a real seismograph records tremors before and during an earthquake, a VIX seismograph "records" volatility shocks in the financial markets. It is often used to highlight the sudden expansion or compression in implied volatility, which tends to correlate with investor fear, uncertainty, and sharp repricing in equities.

📊 What the Data Says

• Average VIX (1990–2024): ~19.1

• Median VIX: ~17.2

• Lowest VIX closes: ~9.14 (2017)

• Highest VIX close: ~82.69 (March 2020)

But more important than the numbers are the patterns:

• Volatility spends more time low than high

• But when it breaks, it breaks fast

• Returns after low VIX readings (under 13) are actually above average, per LPL Research

  • +13.6% over the following 12 months

So while low vol often tempts traders to chase yield, the patient know: the best trades come after it shifts.

• Probability-based setups that can be repeated.

• Strategies that fit into a portfolio framework (not one-off gambles).

• Returns that compound steadily over time, not “get rich quick” marketing pitches.

• Probability-based setups that can be repeated.

• Strategies that fit into a portfolio framework (not one-off gambles).

• Returns that compound steadily over time, not “get rich quick” marketing pitches.

• Probability-based setups that can be repeated.

• Strategies that fit into a portfolio framework (not one-off gambles).

• Returns that compound steadily over time, not “get rich quick” pitches.

🎯 How to Trade Each Type of Setup Like a Pro

1. Low Volatility, High Complacency (Low IV Rank + Tight Ranges)

📉 What it means: Premiums are thin. Traders are underestimating risk. The market often chops in tight ranges or drifts higher.

✅ Best Strategy:

• Focus on directional PMCCs or cash-secured puts in strong uptrends.

• Avoid over-selling premium, pick your spots and wait for premium expansion.

• Size smaller on iron condors and vertical spreads, you’re being paid less to take risk.

🧠 Mindset: This is when mental capital matters most. Small wins add up while waiting for better volatility to return.

2. Rising Volatility (IV Expansion + RSI Divergence)

📈 What it means: Uncertainty is creeping in. Markets may still rise, but options are getting more expensive.

✅ Best Strategy:

• Start scaling into iron condors, short strangles, or Jade Lizards where you’re paid to take a stand.

• Sell into spikes: time your entries after short-term overreactions.

• Layer in PMCCs with more aggressive short calls, but only if underlying trends remain intact.

🧠 Mindset: Volatility is a gift to premium sellers, but don’t confuse opportunity with overconfidence. Stay delta neutral when uncertain.

3. Extreme Overbought or Oversold (RSI(2/7/14) > 90 or < 10)

📊 What it means: Short-term emotions are running hot. Mean reversion becomes likely.

✅ Best Strategy:

• Use short-dated vertical spreads to target reversal zones.

• In overbought markets, sell bear call spreads or collars to hedge gains.

• In oversold markets, sell bull put spreads or add cash-secured puts at strong technical levels.

🧠 Mindset: You don’t need to catch the top or bottom, you just need to structure trades that benefit from reversion.

4. Volatility + Momentum Breakout (IV Rising, RSI Rising, Price Surging)

🚀 What it means: Market’s moving fast, and options are getting more expensive.

✅ Best Strategy:

• Use directional debit spreads or PMCCs to capture upside while reducing cost.

• Use high IV rank to sell puts in uptrends (early-stage Wheel setups).

• Avoid selling premium naked, you’ll get steamrolled if the trend continues.

🧠 Mindset: Embrace directional setups, but stay defined-risk. Think asymmetric, don’t fight the tape.

5. High IV Rank + Low RSI (Fear + Weakness)

😱 What it means: Everyone’s scared. This is often when the best premium-selling trades emerge.

✅ Best Strategy:

• Sell cash-secured puts or bull put spreads in quality names.

• Enter strangles or Jade Lizards when the market is pricing in disaster that’s unlikely to materialize.

• Use defined-risk until the dust settles.

🧠 Mindset: You get paid the most when it feels the worst. Discipline is your edge.

Complacency remains. IV ranks are low across the board. Most traders are still positioned for the “everything rally” to continue uninterrupted. That’s fine, I’ll keep riding my longs with basic hedges in place. This is where portfolio structure, not prediction, provides the real edge.

If you’re wondering which ETFs and equities offer the best opportunity based on current IV, IV Rank, RSI, and expected move data, check out The Implied Truth section in my weekly issues of The Option Premium. That’s where I share what I’m watching and why it matters.

Remember, it’s not about being early or right. It’s about being consistent, managing risk, and putting the law of large numbers on your side.

Probabilities over predictions,

Andy Crowder

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