Rich implied volatility did not pick better puts

The result

We compared implied volatility at entry with the trailing 20-day realized volatility for every resolved paper put, and then checked whether the ratio predicted the trade's result. The correlation was -0.06. The quartile where implied looked richest relative to realized had a win rate of 79%, against 86% for the cheapest quartile.

The idea had also failed an earlier test on how often strikes were breached. Two tests, two measures, same answer: as an entry filter it does nothing useful, and at the extreme it selects the worst trades.

The edge is real, but it is measured after the fact

The return to selling puts does come from the variance risk premium, the gap between the volatility options price in and the volatility that actually happens. In our book that gap, implied at entry minus realized over the hold, ran about +8 to +12 volatility points from July through September, and then went to 0.00 in October. Returns tracked it: positive in the summer months, slightly negative in October.

The catch is the word over the hold. The premium you earn depends on what volatility does after you sell, which you cannot see at entry. Trailing realized volatility is a poor stand-in, and on our data it explained almost none of the outcome. The forward premium explained about 8% of per-trade variance; the trailing ratio, essentially nothing.

Why rich can mean dangerous

Implied volatility rises when the market expects trouble, and sometimes the market is right. A put that looks expensive relative to last month's calm is often expensive because the next month will not be calm. That is adverse selection: the filter chooses exactly the days when the premium is a fair price for real risk.

We saw the same pattern with other sub-selections of the plain 25-delta put: skew, dips, down days and the volatility ratio each matched or degraded the unfiltered version. The only entry conditions with a consistent sign across our four-year replays were the trend and the VIX level, which the lesson on the 200-day moving average covers.

What it changes in practice

Do not expect an IV rank or IV-to-RV screen to improve a put-selling program on its own. If the premium thins, as it did in October, the right read is that the market paid less, not that your rules broke; our lesson on telling regime from decay shows how to check that. And when comparing strategies, test any filter against the unfiltered version on the same days, because a subset that looks better in a short window usually is not.