What Happens When Stock Implied Volatility Outpaces the SPY

Rocky White Wed, August 5, 2026 at 8:42 AM EDT 4 min read

• ^GSPC
• SPY

Option prices are surging for stocks but are relatively subdued for the SPY. In the chart below, I compare the implied volatility (IV) of individual stocks with the IV of the SPY (an ETF based on the S&P 500 Index) using weekly options that expire the following week. Specifically, I calculated the average IV of individual stocks at the end of each week and compared it to the SPY IV.

The chart below is color-coded, highlighting that over the past ten weeks, the average IV of individual stocks has been around 50% (blue), a historically high level. Meanwhile, the SPY average IV has remained relatively low at about 13.5% (orange). This has pushed the spread between the two close to 36% (black), the highest level in my data dating back to 2016.

This is an interesting situation, and this week I'll examine the historical data to see what this has typically meant for the short-term options trading environment.

IOTW 1

Weekly SPY Options vs. Individual Stocks

We would normally expect IVs on individual stocks to correlate with IVs on the SPY, and that's typically the case. However, there are times when they diverge, as they have now.

It makes sense if traders expect big moves from individual stocks, but they expect the big moves in both directions. That could result in little movement from the broad index. In other words, the options market is pricing in large, but uncorrelated, moves in individual stocks.

Before examining how options have performed in this environment, it helps to establish a baseline. Since 2016, I have data on about 550 weeks of option returns. These are at-the-money options purchased at the end of each week and cashed out at intrinsic value the week following their expiration date. The first tables summarizes the returns for SPY options.

Over that period, SPY calls have averaged a return of 12% per trade, reflecting the market's bullish return since then. SPY puts lost, on average, about 15%, while a straddle (buying both a call and put) lost an average of 1.28% per week. The table also shows the percentage of winning trades, the percentage that doubled, and the average returns for winning and losing trades.

The second table shows how options on individual stocks would have performed. Calls averaged a positive return of 3.1% and puts were negative, averaging a loss of 6.4%. Based on these tables, I would say SPY options have performed better than options on the average individual stock. SPY calls had a higher average return, and SPY straddles lost less money than straddles on stocks.

Story Continues These results give us a benchmark. Next, we'll see whether option returns have historically changed when the gap between individual stock IVs and SPY IVs widens to extreme levels like those we're seeing today.

IOTW 2 In the latest week, which would be options purchased on Friday, July 24 and expiring on July 31, the average IV for individual stocks was 63% while the SPY at-the-money IV was about 16%. That gives us a ratio of about 3.9 which is in the 92nd percentile. In other words, IVs on individual stocks are at an extreme compared to the SPY IV.

Going back to 2016, there were 65 weeks in which the "Average Stock IV-to-SPY IV Ratio" was greater than 3.75. This gives us 65 SPY option returns, while the individual stock table includes all options meeting the liquidity requirements in those same weeks (over 25K data points).

In these situations, SPY options proved to be underpriced. SPY calls performed very well, averaging a return of 28%. Straddles were also positive overall, with an average return of 6.3% per trade. Options on individual stocks, on the other hand, struggled. While SPY calls did great, calls on individual stocks lost over 5% per trade. Straddles on individual stocks lost 2.3% on average, worse than the baseline return established above. The put options on individual stocks, however, eked out a small gain of 0.6% per trade.

IOTW 3

Implications

With options pricing in low volatility on the SPY and higher volatility on individual stocks, SPY options appear to have been underpriced relative to individual stock options. The historical data supports this. Because a straddle profits from a big move either up or down, it's the best measure of whether options were underpriced or overpriced. In these situations, SPY straddles averaged a healthy 6.3% return, while straddles on individual stocks lost an average of 2.3%.

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