How Do Volatility Cones Help a Trader Compare IV and HV?

Volatility cones are graphical tools used by options traders to visually compare an asset's implied volatility (IV) against its historical volatility (HV) across different time horizons. The cone plots the range of historical volatility (e.g. the 10th to 90th percentile) for various lookback periods.

A trader can then plot the current IV curve onto the cone. If the IV curve is above the historical range, it suggests options are relatively expensive; if it's below, they are cheap.

This helps assess whether current option prices are over- or undervalued relative to past realized volatility.