Some great points on volatility that everyone needs to internalize, via Bernie Schaeffer's July newsletter. Keep in mind it went out to subscribers on June 25, before the recent modest upswing in volatility.

"You can't refer to the cheapness or the richness of the Chicago Board Options Exchange Market Volatility Index (VIX) outside the context of historical volatility. The VIX is, first and foremost, a measure of the anticipated volatility of the near-term options on the S&P 500 Index, and the most important clue over the years to the current level of the VIX has been the short-term (10-day or 20-day) historical volatility of the S&P (the VIX calculation doesn't exactly equate to a historical volatility but it is close enough).

"So the use of the VIX level as a "fear gauge" must always be assessed net of the major influence of historical volatility on the VIX. While it is tempting after today's VIX implosion to less than half its peak levels in January to suggest that investor fear has dissipated to dangerously low levels, this assessment is seriously complicated by the fact that the VIX is not 'low' in the context of the recent volatility of the S&P."

It's a point I've always tried to hammer home, too. Implied volatility attempts to divine the volatility of the underlying over the stated time frame (usually the next 30 calendar days). There are always expectations of impending news events, and so on, but the best "prediction" tool is simply the volatility of the underlying over the past 2-4 weeks.

What else would you base your markets on besides what you "feel" right now? And as we know, realized volatilities utterly caved early in the cycle, and those "cheap" options actually overbid. That's not uncommon. In fact, McMillan showed an average 4-point overbid of implied volatility (IV) relative to historical volatility (HV).