My friend Bill brings up some very good points in the comments recently. Option volatility, most readily expressed by the VIX, is actually not high relative to actual market volatility.
The upper chart show 30 day implied vol. of the SPY in yellow, and 30 day Historical volatility in blue. And as you can see they have moved almost in lockstep.
But here's the kicker, the IV anticipates 30 days ahead, while the HV tells you what happened 30 days behind. So in order to match up how a general option purchase did, you would have to mentally move the yellow one month, or box over to the right. In other words, let's say you bought volatility in the form of 30 day options today. You'll theoretically profit if the volatility of the actual market going forward 30 days is greater than the volatility you paid (pending specifics, I'm generalizing here). We don't know how that will work out yet, but we do know with the offset that owning options at a low 20's volatility worked stupendously well as actual realized volatility continues to climb.
Down below we show 10 day normalized historical volatility, a noisier but better measure for volatility in the here and now. And that has shot up above 60.
What's striking is this is the mirror image to almost the entirety of 2005 and 2006. SPY volatility sat in the low teens and below, and even at those "bargain" prices, options were consistently overpriced relative to actual volatility. Which often was something like an 8 and below.
So yes, options were irrationally fearful at a 13 volatility in 2006, but not necessarily fearful enough at a 30 and even above in 2008. 48 probably another story, but time will tell.
