Short options
What is the Volatility Risk Premium (VRP) and why does it historically favor option sellers?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The volatility risk premium refers to the historical tendency for implied volatility to exceed subsequently realized volatility, which some research suggests has provided a structural edge to option sellers over long periods, though outcomes vary by market regime.
How it works
This premium is thought to compensate sellers for bearing the risk of outsized, unpredictable moves, similar to an insurance premium that is usually profitable but occasionally pays out large claims.
An example
If a stock's implied volatility averages 30% annually while its realized volatility averages 25%, sellers collecting premium based on the higher implied figure may benefit over many trades.
Risk & limitations
OIC cautions that VRP is a historical average observation, not a guarantee, and can reverse sharply during volatility spikes that produce large losses for sellers.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.