Implied Nervousness

Oren Trask: You've got a real fire in your belly. Or was this just a one-time stunt that you pulled?
Tess McGill: I'm not quite sure what you mean, sir. I've got something in my belly, but I think it's nervous knots.
--Working Girl

When recently looking at option chains for the first time in a while, I was surprised by how pricey out of the money puts and calls were. Usually, when markets are trending higher, call premium is sold and downside protection is shunned--which both tend to suck premium out of options and collapse implied volatilities. 

So I called up a chart of the Volatility Index (VIX). Sure enough, the index is still above 20--nearly double the level that I'm used to seeing in staid markets flirting with highs.

However, given the magnitude of spike in implied vols associated with last year's corona crash, this doesn't appear all that unusual. A similar spike in 2008-09 required a couple of years before 'normal' volatilities (i.e., sub 10 readings on the VIX) returned. It seems we're following a similar path this time.

Note also the parabolic pattern of decline following most volatility spikes.

The lesson is that, once a big volatility event occurs, it takes a while for nervousness among market participants to dissipate.