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Volatility Risk Premium (VRP) is the difference between implied volatility and realized volatility. Because options buyers pay for insurance against large moves, implied volatility tends to exceed realized volatility — this persistent spread is the structural edge that premium sellers harvest. A VRP of +5 pp means options are priced 5 percentage points above the stock's actual recent movement.
VRP quantifies how much “extra” volatility is priced into options beyond what the underlying stock actually delivers. It exists because options have asymmetric payoffs — buyers need protection, and sellers are compensated for providing it.
VRP = IV 30d − HV 20dExample: If MSFT IV 30d is 24% and HV 20d is 18%:
VRP = 24% − 18% = +6.0 percentage pointsOptions are priced 6pp above actual recent movement — a healthy edge for premium sellers.
VolRadar implementation:
exErn_vrp_30d which strips earnings IV premiumWhy different lookbacks? IV 30d is the market's forward-looking estimate for the next 30 days, while HV 20d is the most recent realized movement. Using a slightly shorter realized window captures current vol more accurately than a 30d average, which is what market makers primarily compare when setting option prices.
VRP > +5ppOptions are significantly overpriced. Favorable for premium selling.
VRP +2 to +5ppOptions are somewhat overpriced. Standard premium selling conditions.
VRP ~0ppOptions are priced in line with realized movement — minimal VRP edge for sellers.
VRP < 0ppRealized vol exceeds implied vol. Stock is moving more than expected. Unfavorable for selling premium.
Before earnings, implied volatility spikes to price in the expected post-announcement move. This inflates VRP even if the “clean” edge outside earnings is minimal. VolRadar separates earnings-driven VRP from structural VRP so you can see whether the edge persists after the earnings event passes.
Options are priced for more movement than is actually occurring. This creates a statistical edge for premium sellers — the premium collected tends to exceed the cost of the actual stock movement over many trades.
The stock is moving more than options priced in. This is unfavorable for premium sellers and often occurs during market stress, earnings surprises, or sudden regime changes.
VRP = IV 30d (ORATS) minus HV 20d (ORATS close-to-close). A separate earnings-adjusted VRP strips out the earnings-driven portion of IV to show the clean edge outside of event risk.