Case Study · The Carry and the Crash
Free to readThe Carry and the Crash — 2017 into Feb 2018
A full year of rich, reliable premium — and the single session that paid much of it back. 2017 is the clearest lesson in what selling the VRP really is.
If March 2020 is the VRP's violent tail, 2017 is its seductive body: month after month of positive premium that made selling volatility look less like a risk and more like an income stream — until the bill arrived.
The setup
2017 was one of the calmest years on record. Realized volatility sat near historic lows, while implied vol — though also low — stayed persistently above it. That gap is a positive VRP, and in 2017 it was positive almost every single month. Selling it worked so consistently that a whole ecosystem of short-volatility strategies grew up around harvesting the carry.
Realized near record lows; implied modestly above it. VRP positive month after month — the carry pays, the percentile sits comfortably rich.
Still positive, still calm — and increasingly crowded. The premium looks like free income right as the cushion thins.
Volatility snaps higher in a single session; short-volatility products implode. Realized vaults above implied — VRP prints sharply negative and a year of carry is repriced.
A higher-vol regime; the premium normalizes from a less complacent base.
Illustrative. The premium was positive virtually all year — and the longer that held, the more crowded and complacent the carry became. A single session repriced much of it. Schematic, not a price chart.
What the VRP showed — and didn't
The VRP did not say "stop selling." A persistently positive, richly-ranked premium is a real edge, and harvesting it through 2017 was the right read. What the chart kept in front of you was the shape: a long run of small positive readings is the carry's body, and the absence of a recent negative print is not the absence of one to come. The percentile told you the premium was generous; it could not tell you the day it would invert.
Selling the VRP is being paid to insure a risk that rarely shows up. The carry is real and worth harvesting — but the position must be sized for the negative tail, because the calmer and more crowded the run, the larger the eventual print.
This case study is free. To watch a name's premium harvest and then invert: ETFs with ETF Analytics, single stocks with ETF + Equities, full history via Everything.
See plans →Your next step
Open the tool → Case study: the premium goes negative, Mar 2020 → Read: trading the premium →Educational content from Nations Indexes. Event facts (2017's record-low realized vol, the Feb 5, 2018 volatility spike and short-vol product losses) are historical and verifiable. The figure is an illustrative recreation, not a price chart, and nothing here is investment advice.