Variance Risk Premium · Foundations
Free to readPositive, Negative & the Percentile
The sign tells you who won. The percentile tells you whether it's worth doing again. Two readings carry the whole story.
The variance risk premium is implied vol minus the realized vol that followed. Its sign and its percentile are all you need to read it.
The sign — who got paid
A positive VRP means the option market charged more volatility than the underlying delivered: sellers were overpaid, short-vol carry worked. A negative VRP means realized movement outran what was priced: buyers of options won, sellers paid up. The premium is positive most of the time — which is exactly why selling it feels safe right up until it doesn't.
The premium spends most of its life modestly positive — the carry. Then a stress event drives realized far above implied and VRP plunges, handing back a long run of small gains at once.
The percentile — rich or cheap
A raw number can't tell you whether +3 vol points is a lot. The VRP percentile ranks today's premium against the name's own history. High percentile = unusually rich premium, generous to sellers. Low or negative = thin or inverted, a warning. The percentile is the dial you actually trade off — it normalizes the premium across names and regimes.
Positive and high-percentile = rich carry (favors selling vol, sized for the tail). Negative or low-percentile = the premium has thinned or inverted (stand down, or own vol). Sign for who won; percentile for whether to play.
Why it mean-reverts
Like volatility itself, the premium reverts. After a negative blowout, implied stays elevated while realized fades, and VRP swings richly positive again — often the best carry comes right after the worst print. After a long rich stretch, complacency thins the premium and sets up the next negative tail. The percentile is how you see where in that cycle you are.
It's a carry trade with a tail
The defining feature of the VRP is its shape: many small positive readings and a few large negative ones. That's the signature of carry — a strategy that's paid to take a risk that rarely shows up but is severe when it does. Respecting that asymmetry — harvesting the premium without being wiped out by the tail — is the entire craft.
The framework is free. To see a live premium and its percentile: ETFs with ETF Analytics, single stocks with ETF + Equities, full history via Everything.
See plans →Educational content from Nations Indexes. Variance Risk Premium™ and VolDex® are marks of Nations Indexes. Diagrams are schematic. Nothing here is investment advice.