Volatility risk premium (implied vs realized)
The volatility risk premium is the difference between the volatility implied by option prices and the volatility the underlying subsequently realizes over the same period. For equity indices it has historically been positive on average, rewarding option sellers most of the time and penalising them sharply during sell-offs.
Senzoukria · Glossary · Updated September 2026
At a glance
- Definition
- Implied volatility at t − realized volatility from t to expiry
- Typical sign on equity indices
- Positive on average, negative in sharp sell-offs
- Measurement rule
- Compare implied with the realized volatility that followed, not the past
Definition
Implied volatility is the market price of expected variability; realized volatility is what actually happens. The volatility risk premium compares the two over the same window: implied volatility quoted at the start minus the realized volatility measured until the option's expiry. A positive value means option buyers paid for more movement than occurred. Cboe's own description of its VVIX portfolios notes that they have usually been priced at a premium to subsequent realized volatility and calls the difference a volatility risk premium.
Worked example
A 30-day at-the-money option is bought at 16% implied volatility. Over the next 30 days the index realizes 12%. The premium is 4 volatility points. A delta-hedged short position in that option would, before costs, have earned roughly the difference between implied and realized variance weighted by its gamma along the path. If instead the index realized 25%, the premium would have been −9 points and the seller would have lost.
Measuring it correctly
- Compare implied volatility with the realized volatility that followed, not with the realized volatility of the previous month; the latter is a forecast comparison, not a premium.
- Use the same annualisation convention for both and the same window as the option's life.
- Average values hide the distribution: most periods show a small positive premium, a few show large negative ones, and those few decide the result of selling volatility.
- The premium exists because selling options means taking losses in exactly the states when losses hurt most; it is compensation for risk, not a free edge.
In Senzoukria
Senzoukria does not compute a volatility risk premium. The implied side is on the GEX module's Volatility page, with the ATM IV of each expiry, and the realized side is available on charts through the Realized Vol indicator, whose annualisation must be set to match the bar timeframe before comparing. Recording both at the start of a window and measuring the realized value at its end is the look-ahead-free way to build the comparison.
Related
- Realized volatility
- Implied volatility (IV)
- Volatility cone
- Lookahead bias (data leakage)
- Realized Vol indicator
In the same section
- Short volatility
- Variance swap
- VVIX
- Volatility skew
- Volatility drag
- Volatility smile
- Volatility crush
- Volatility surface
Sources
- Cboe — Double the fun with Cboe's VVIX Index (2026-09-25)
This page in other languages
Frequently asked questions
- Does a positive volatility risk premium mean I should sell options?
- No. A positive average premium coexists with rare, very large losses, and the average is only earned by surviving those. Position sizing, tail risk and costs decide the outcome, and none of this is advice to take the trade.
- Why compare with future realized volatility rather than past?
- Because the option pays according to what happens after it is bought. Comparing implied volatility with the past month measures how the market's forecast differs from recent history, which is a different question from what option buyers and sellers actually earned.