VRP in simple terms
Volatility Risk Premium (VRP) is the difference between what the options market implies volatility will be (implied volatility) and what it actually turns out to be (realized volatility). Because options buyers pay for insurance against big moves, implied vol tends to be higher than realized vol — this difference is the "premium" that sellers collect. Note: true forward VRP is only knowable in hindsight. VolRadar approximates it using ORATS IV 30d minus ORATS HV 20d (close-to-close) — a standard proxy that captures the structural edge without requiring a prediction of future realized vol.
Why VRP matters for premium sellers
When VRP is positive, options are priced for more fear than the market is actually experiencing. This is the core edge for premium selling strategies like short puts, iron condors, and strangles. The larger the VRP, the more "overpriced" options are relative to actual risk.
Premium Edge — the market-wide view
Individual stock VRP can be noisy. Premium Edge (VRP Breadth) measures what percentage of stocks across the index have overpriced options right now. When 70%+ of stocks have positive VRP, conditions broadly favor premium selling. When it drops below 50%, the edge is thin and selectivity matters. VolRadar computes this daily after market close using end-of-day data.
Typical VRP ranges
Historically, VRP is positive about 70-80% of the time across all market conditions, averaging around 3-5 percentage points for large-cap stocks. This is the unconditional long-run rate — during favorable regimes it can be higher, during stress periods it drops sharply. During calm periods, VRP can expand to 8-12 percentage points — the sweet spot for premium sellers. During crises, VRP can flip negative, meaning realized vol exceeds what was priced in — a dangerous time to sell premium.
How to use VRP in your trading
Check VRP before entering any premium selling trade. If VRP is negative or near zero, the "edge" from selling options is minimal — you are not getting paid enough for the risk. When VRP is above +2pp and Premium Edge is above 60% (meaning 60%+ of S&P 500 stocks have positive VRP), conditions are ripe. VRP above +5pp = strong edge. Combine VRP with IV Rank and RV Ratio for the complete picture.