How we calculate it, where today’s reading sits in history, and what VIX did next
The volatility risk premium (VRP) is one of the simplest ideas in volatility trading. It compares the move the options market is pricing for the future with the move the market has actually made in the recent past.
If VIX is at 18, options are pricing about 18% annualized movement in the S&P 500 over the next month. If the index has only been moving 12%, those options look expensive versus recent history. The 6-point gap between the two numbers is the VRP.
The gap is positive most of the time. Options usually cost more than the move that actually shows up afterward. That is why selling premium works often enough.
You only need two inputs: VIX and the S&P 500 close.
First it measures how much the index actually moved in the last 6 months by taking its last 120 daily moves.
Then it takes the standard deviation of those moves and annualizes it:
RV120 = standard deviation of the daily log returns × √252 × 100
The √252 converts a daily figure into an annual one because there are about 252 trading days in a year, and volatility scales with the square root of time. Multiply by 100 so the number is a percentage you can compare directly with VIX.
Then subtracts:
VRP = VIX − RV120
A VRP of 6 means nothing on its own. The tool ranks today’s reading against every past VRP in the history. If it beats 850 out of 1,000 prior days, today sits at the 85th percentile. That percentile is what the tool uses for the match.
Across 4,890 sessions since February 2007, VIX typically moves in a 7.77 point range over the next month. That is the baseline everything is measured against.
| Reading | Sessions | Median move |
|---|---|---|
| VRP in its top 30% | 1,472 | 11.16 pts |
| Baseline | 4,890 | 7.77 pts |
| VRP in its bottom 30% | 1,467 | 6.81 pts |
A high VRP reading is followed by a range about 44% wider than normal, and about 64% wider than the range that follows a low reading.
Those are moves in either direction.
Almost every volatility signal rises when VIX rises.
If you want to know if a tool has any edge, the test that matters is to see if it provides any predictive power when VIX is at the same level.
We took days where VIX was in the same range, then compared high-VRP days against all days in that range.
| VIX level | All days | Top 30% VRP | Difference | High-VRP sessions |
|---|---|---|---|---|
| 14 to 17 | 6.42 pts | 7.36 pts | +0.94 | 174 |
| 17 to 20 | 7.91 pts | 9.19 pts | +1.28 | 386 |
| 20 to 25 | 9.41 pts | 11.05 pts | +1.64 | 386 |
| Over 25 | 13.07 pts | 14.78 pts | +1.71 | 485 |
The gap is positive in all four VIX buckets, and the gap grows as VIX rises. That is what separates a real signal from one that is just VIX wearing a different name.
The tool runs this calculation every day. It shows today’s VRP, where that reading sits in its own history, and then finds the past days that looked the same: a similar VIX level and a similar VRP percentile.
From those matched days it shows what VIX went on to do over the next 5, 10 and 20 trading days.
There is also a log of every matched day underneath, so you can study the dates and readings behind the numbers.
The Volatility Risk Premium radar shows today’s reading, its percentile, and what VIX did after similar days.
Open the VRP Radar
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