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Chapter One – What is the VRP? 

The volatility risk premium (VRP) may be used to increase returns and reduce risk in portfolios.

Simply stated, the VRP is the premium in price paid by option buyers to option sellers. It can be thought of as similar to the cost (or premium) associated with buying insurance. 

Based on simulated data, equity index options have exhibited a positive VRP more than 85% of the time since 1990.  

As a result, when constructed well, there may be opportunities to harvest the VRP and access additional return opportunities without substantially increasing the portfolio risk. 

Check out our comprehensive overview of Parametric’s VRP Solutions.

1990 to the present represents the longest period from which reliable data is available for the S&P 500 Index implied volatility. S&P 500® Index options relative valuation measured by taking daily observations of Implied Volatility (as measured by VIX Index) and subtracting the subsequent Realized Volatility of the S&P 500® over the following 30 days. Options have historically traded about 4.3 volatility points above subsequent realized volatility. Said another way, the option market tends to overestimate future volatility, which translates directly into higher prices for both puts and calls. VIX is the Chicago Board Options Exchange volatility index. VIX is calculated constantly throughout each trading day by observing the implied volatility derived from actual market prices of a wide array of put and call options with an average maturity of 30 days to expiration. For informational purposes only.

Learn more about the VRP

For informational and illustrative purposes only.  Not an offer to buy or sell securities.  Past performance not indicative of future results.  Not able to invest directly into indexes.  Investing in an options strategy involves risks. One or more combinations of the following risks may be incurred: Trade Restrictions Risk, Liquidity Risk, Early Termination Risk, Option Collateral Risk, and Opportunity Risk.  See disclosure pages for additional information.  All investments are subject to loss. For use with Investment Professionals and Accredited Investors Only.

Read more from our 5 part series:


Capturing the VRP


The VRP Suite


VRP in Action


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