Reference

FAQ & glossary

Why isn't VIX itself tradable?

VIX is a formula, not a security — a weighted average of S&P 500 option prices that estimates 30-day implied volatility. You can trade VIX futures and options, but those price in the market's expectation of where VIX will be, not its current level, so they don't give you clean exposure to the spot number. The realized-vol side of the premium has no listed instrument at all. That's why the strategy test here uses a straddle on the underlying ETF as a stand-in.

Why a 21-trading-day horizon?

VIX and its cousins are built to forecast volatility over the next 30 calendar days, which is about 21 trading days. Matching the realized-vol window to the index's own horizon is the whole point — comparing a 30-day forecast to, say, 5-day realized vol would measure something else.

What does a positive VRP actually mean?

On average, the options market charged for more volatility than subsequently occurred. Buyers overpaid relative to the outcome; sellers were compensated. It does not mean volatility was 'wrong' — the premium is payment for bearing the risk of a large move, and that risk is real even in months when it doesn't show up.

If the premium is real and significant, why can't I just sell options?

Several reasons, all visible on the market pages: (1) bid/ask spreads and commissions roughly halve the illustrative Sharpe, and worse in less liquid names; (2) the return distribution is sharply left-skewed — most months are small wins, a few are large losses; (3) an unhedged short straddle is also a bet on small moves, not pure volatility; (4) margin requirements expand exactly when volatility spikes, which can force you out at the worst moment; (5) the daily mark-to-market path is far uglier than the monthly-close numbers.

Why is the delta-hedged Sharpe higher than the unhedged one?

The unhedged straddle carries large directional variance — any big move in the underlying, up or down, hurts the seller. Delta-hedging removes that, leaving mostly the premium minus realized variance, which is a smoother (and here, still positive) series. This is why real volatility desks delta-hedge. It also requires continuous trading in the underlying, which has its own costs not modeled here.

Where are small caps?

The Russell 2000 volatility index (^RVX) isn't available from the data source used here. Rather than substitute a proxy, small caps are left out.

Can I get the underlying data?

Yes — the full results JSON is linked on the methodology page, and the analysis code is in the repository.

Terms

Glossary

Implied volatility
The volatility figure embedded in an option's price. Higher implied vol = a more expensive option. The vol indices (VIX etc.) express it as an annualized percentage.
Realized volatility
The volatility that actually occurred, measured here as the annualized standard deviation of the underlying's daily log returns over a window.
Volatility risk premium (VRP)
Implied volatility minus subsequent realized volatility. Positive means options were 'rich'.
Straddle
Buying (or selling) both a call and a put at the same strike and expiry. A short straddle profits if the underlying stays near the strike and loses if it moves a lot in either direction.
ATM (at-the-money)
An option whose strike equals the current price of the underlying.
Delta
How much an option's price moves for a $1 move in the underlying. Delta-hedging means holding an offsetting position in the underlying to neutralize it.
Skewness
A measure of asymmetry in a distribution. Negative skew (as here) means the left tail — the losses — is longer and fatter than the right.
Non-overlapping t-stat
A significance test run on observations spaced far enough apart that their forward windows don't overlap, so they can be treated as independent. Prevents the inflated significance you'd get from overlapping daily windows.
Newey-West (HAC)
A way to compute a standard error that corrects for autocorrelation in the data — an alternative to the non-overlapping approach, reported alongside it.
Drawdown
The peak-to-trough decline in an equity curve. Max drawdown is the worst one on record.
Mark-to-market
Valuing a position at current market prices rather than only at expiry. The daily mark-to-market view reveals interim losses that a monthly-close view hides.

Full methodology → · data generated 2026-08-28