Implied volatility is usually a markup.
The volatility risk premium is the tendency for option-implied volatility to exceed the volatility markets subsequently realize — the compensation sellers demand for taking crash risk. This project measures it across four asset classes, back to 1990, and asks whether it survives an honest out-of-sample test.
Implied volatility has exceeded subsequent realized volatility by an average of 3.7 points for the S&P 500 (95% CI 2.9 to 4.3), positive in 4 of 4 markets out of sample.
Option buyers are paying for insurance and convexity; sellers are paid to warehouse the risk of a large move. The premium is largest in the calmest regimes and inverts during crises.
Hard. After costs the edge shrinks sharply, the losses cluster, and a delta-unhedged seller is also betting on small moves. This is difficult and dangerous to monetize.
Where the premium shows up
| Market | Mean VRP | 95% CI | Skew | Worst 1% | OOS VRP | t-stat | Straddle Sharpe | …after costs |
|---|---|---|---|---|---|---|---|---|
| S&P 500^VIX | +3.67 | 2.9 … 4.3 | -3.2 | -23 | +3.70 | 10.3 | 1.31 | 0.77 |
| Nasdaq-100^VXN | +4.04 | 3.1 … 5.0 | -2.1 | -24 | +2.90 | 8.7 | 0.74 | 0.32 |
| Crude oil (USO)^OVX | +5.78 | 3.9 … 6.9 | -0.3 | -22 | +6.14 | 7.1 | 0.49 | 0.19 |
| Gold (GLD)^GVZ | +2.65 | 1.9 … 3.5 | -1.7 | -24 | +2.02 | 6.8 | 0.48 | 0.07 |
VRP is in annualized volatility points: the vol index minus realized volatility over the next 21 trading days. t-stat is on non-overlapping monthly observations. “Straddle Sharpe” is the illustrative unhedged monthly short straddle; “after costs” applies a 5% bid/ask haircut and 0.15% commission — see methodology.
Data through Jul 2026 · generated Aug 2026