What is implied volatility?
Implied volatility is the market's consensus estimate of how much a stock will move over a given period, derived from option prices. It is forward-looking — it reflects expectations, not history. Higher IV means options are more expensive. IV is quoted as an annualized percentage: 30% IV on a $100 stock implies roughly a $30 annual range (1 standard deviation). IV changes constantly as supply and demand for options shift.
What is realized volatility?
Realized volatility (also called historical volatility) measures how much a stock actually moved over a past period, calculated from price data. The VolRadar VRP calculation uses ORATS 20-day close-to-close historical volatility. Yang-Zhang volatility is displayed separately on ticker analysis pages for comparison. RV is backward-looking: it tells you what happened, not what will happen. RV 20% means the stock actually moved at a 20% annualized rate over the measurement window.
Why IV almost always exceeds RV
Options contain a risk premium — buyers pay extra for protection against tail risk (rare but large moves). Sellers demand compensation for bearing that tail risk. This structural dynamic means IV persistently exceeds RV by 3-5 percentage points for large-cap stocks on average across the market. The gap exists because option buyers overpay for "insurance" and sellers profit from collecting the overpriced premium. This pattern has been documented in academic research across decades and markets.
VRP: the gap that pays premium sellers
The Volatility Risk Premium (VRP) = IV − RV. Positive VRP means options are overpriced relative to actual movement — the core edge for premium selling. VolRadar computes VRP daily for every S&P 500 stock using 30-day IV from ORATS and ORATS 20-day close-to-close historical volatility. When VRP is positive and wide, conditions favor selling premium. When VRP is negative (RV exceeds IV), options are underpriced and selling premium is risky.
Using both metrics together
IV alone tells you options are expensive, but not whether they are overpriced. RV alone tells you how much the stock moved, but not whether the market expects more. You need both: IV Rank above 50 (options are expensive relative to recent history) plus positive VRP (options are overpriced relative to actual movement). The Scanner combines both filters to surface the best premium selling candidates.
Measurement windows matter
IV uses a 30-day window; the VRP calculation uses a 20-day RV window. Shorter windows (10-day RV) are more responsive but noisier. Longer windows (60-day) are smoother but lag turning points. The 20-day RV window balances responsiveness and stability for the VRP signal. Around earnings, the measurement window matters especially — 10-day RV may spike dramatically while 20-day RV stays calm, creating divergence in the VRP signal.