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.