Volatility · 8 min read

IV vs Realized: The Volatility Risk Premium

Options usually price more volatility than materializes. Measuring the gap — and forecasting realized vol better than the market — is one of the oldest durable edges in options.

The premium, defined

Implied volatility is the market's price for future movement; realized volatility is the movement that actually arrives. Systematically, implieds trade above subsequent realized — sellers of insurance demand compensation. That gap is the volatility risk premium (VRP), and harvesting it (or spotting when it inverts) is a foundational options strategy family.

VRP = IV²(t,T) − E[RV²(t,T)]
Volatility risk premium: the spread between the implied variance and the expected realized variance over the same horizon.

The forecasting problem

The premium is only measurable against a forecast of realized volatility — and this is where models earn their keep. Naive forecasts (trailing historical vol) are beatable: realized vol clusters, mean-reverts, and responds to the surface itself, to flow, to positioning and to the macro calendar. Recent research keeps finding that options-derived inputs improve realized-vol forecasts over price-only models.

A neural forecast RV̂ turns the premium into a live spread: when IV is far above RV̂, options are rich — favoring structures that sell volatility with defined risk. When IV sits below RV̂, options are cheap — favoring long-volatility structures. Crucially, a good system does not naked-sell anything: it selects spreads (verticals, calendars, butterflies, condors) whose risk matches the confidence and the regime.

Honesty requirements

Volatility forecasting is an area where in-sample results flatter easily. Our research program treats every vol model like any other candidate edge: pre-registered targets, leakage-guarded features (nothing that peeks past the forecast date), a sealed test period touched once, and a forward ledger that logs live predictions before outcomes exist. A VRP signal only reaches this site's Signals page after passing those gates on data it has never seen.

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Educational content only. Nothing here is financial advice. Options involve substantial risk of loss.