Variance Risk Premium Calculator

Options are priced off expected volatility, and on average that expectation has exceeded what markets subsequently delivered. The gap, implied minus realised, is the variance risk premium: compensation flowing from buyers of insurance to its sellers.

This tool takes an implied volatility and a realised volatility and expresses the spread the way practitioners track it, in volatility points and in variance terms. A market pricing 20 implied against 16 realised is paying sellers four points of premium; sustained negative readings, realised above implied, mark the episodes where sellers are the ones writing cheques.

The premium exists because drawdown insurance is worth more than its actuarial cost to investors who cannot tolerate the drawdown. It is harvested by covered calls, put writing and short-volatility programmes, and its occasional violent reversals are why position sizing, not the premium itself, decides who survives.

Background reading: Volatility risk premium in the Knowledge Hub · All tools