Volatility is low and that has people concerned. So much has been written about this subject that one columnist has wryly observed "people are worried that people are not worried enough," which implies markets are supposed to move a certain amount. Some analysts have gone further, presenting an analogy between low market volatility and an overcompressed spring. They claim pressure in this spring is building, and when it explodes, the carnage will be massive — particularly for option sellers.
That sounds ominous. It would certainly be concerning if volatility sellers were lulled into a false sense of security during the past few years of market calm. However, we took a look and found there have been some market jolts in this relatively calm period, and these jolts can shine some light on what option sellers might experience if volatility suddenly spikes after a period of calm markets. This analysis helps to demonstrate that investors can earn the well-compensated volatility risk premium over time without taking excessive tail risk, when implemented in a reasonably sized strategy.