Changes in Implied Volatility generate Cost & Compensation for changes in Expected Risk.
When implied volatility changes, it results in two things: 1) It produces immediate profit or loss in the option position, and 2) it determines the change in the stock's expected risk to the position.
We can therefore compare our implied volatility P&L to the changes in expected risk to see if we are being under-paid or over-paid for those changes.
If we are under-paid (or over-charged) for the change in expected risk, it suggests that our options are cheap. If we are over-paid (or under-charged), it suggests that our options are expensive.
In the figure above to the right, our hypothetical trade has generated $95 in compensation. By isolating this portion of the total P&L, we can easily compare it to the change in expected risk (not shown here). We can then determine if the $95 represents over-payment or under-payment for the change in expected risk.
