May 12, 2026

The volatility risk premium as a tradeable signal

Implied vol is systematically higher than realized vol. That gap pays sellers of options on average — but the pattern is structural, not free money.

TODO — write the post body here. Outline:

  • Define VRP: IV(T) - RV(T) measured ex-post over a rolling window. Use VIX vs subsequent 30-day realized SPX vol as the canonical pair.
  • Show the empirical: VRP is positive on average, ~3-4 vol points historically.
  • The cleanest expression of the trade — short variance swap, or systematic short straddle with delta hedging.
  • Why it persists: insurance demand, leverage constraints on natural sellers, tail-risk aversion.
  • Why it isn't free: realized drawdowns when the premium does pay out are large (2008, 2020). Sharpe ratios look fine on paper, but the tail is the whole story.
  • One paragraph on how to size the trade — vol-targeting, regime filters, anything that conditions on the level of VIX.
All notes