What is the volatility risk premium in options?
The volatility risk premium (VRP) is the difference between an option's implied volatility and the underlying asset's realized volatility over the same period. A positive VRP means the option market is pricing in more volatility than has historically occurred — a condition option sellers typically seek to identify.
How the volatility risk premium is measured
- VRP is calculated as implied volatility (IV) minus realized volatility (RV) for the same underlying and time period
- A positive VRP means option buyers are paying more for volatility than has been historically realized
- A negative VRP means realized volatility has exceeded the market's implied expectation
- OptiScan displays the IV-to-RV ratio and VRP as filterable columns in the scanner results table
Why the volatility risk premium matters
- Option sellers typically seek underlyings with a consistently positive VRP, where implied volatility historically exceeds realized volatility
- A high IV-to-RV ratio suggests option premiums are elevated relative to recent price behavior
- Monitoring VRP helps traders assess whether current option prices are historically high or low before entering a position
How to use VRP in OptiScan
- Add the volatility risk premium or IV/RV ratio as a filter or visible column in the OptiScan scanner
- Filter for contracts where implied volatility exceeds realized volatility to screen for elevated premium environments
- Combine with IV rank to assess both the current level of IV and its historical tendency to exceed realized volatility