The Volatility Risk Premium (VRP) Radar calculates the spread between implied VIX and historical realized volatility. By ranking this premium into a historical percentile and executing a Dual-Variable Matching Protocol (VRP Percentile + Spot VIX Level), the analyzer identifies statistically similar historical environments to project forward VIX spike probabilities across 5-, 10-, and 20-session trading windows.
Realized Volatility (HV) measures the actual price movement the S&P 500 delivered over a historical lookback window (such as 6 months).
1. Conceptual Hierarchy
Two distinct metrics describe market volatility: implied forward expectations versus historical delivered movement. The Volatility Risk Premium represents the price difference between expected protection and delivered movement.
The dashed line marks what the index actually delivered. Everything the VIX column carries above it is the premium, which on this reading came to 4.60 points.
Positive VRP (VIX > Realized Vol): Implied volatility trades at a premium to historical movement. Options buyers are paying a surcharge for downside protection beyond what the index has delivered. This is the baseline state for equity options markets.
Negative VRP (Realized Vol > VIX): Delivered index volatility exceeds implied pricing. The market is moving faster than options were priced to accommodate, a dynamic typically observed during active market shocks.
Radar Focus
The tool evaluates how rich or cheap the active premium is relative to its historical distribution, measuring what market paths followed similar readings.
2. Baseline System Inputs
The system captures two live inputs from the active trading session:
A raw premium of +4.60 points cannot be interpreted in isolation. To evaluate whether this reading represents a cheap, typical, or elevated premium, the analyzer converts the point spread into a historical percentile.
1. VRP Formula & Percentile Rank Calculation
The Volatility Risk Premium measures the point gap between annualized implied volatility and annualized 6-month realized volatility:
VRP = Spot VIX − 6-Month Realized Volatility
Example Execution: 18.82 − 14.22 = +4.60 Points
This raw value is then ranked against the entire dataset of historical daily trading sessions:
VRP Percentile = Rank of Active VRP Across Historical Record
Example Execution: +4.60 Points ⇒ 71st Percentile
The premium sits in the 71st percentile, so options are priced richer than delivered volatility more often than not, without being anywhere near the extremes at either end.
2. Dual-Variable Matching Protocol
Candidate historical sessions must satisfy two independent constraints simultaneously:
Both constraints have to hold on the same session. The percentile keeps the premium comparable; the VIX filter keeps the starting point comparable.
Why the VIX Level Filter Matters
Because option volatility premiums tend to expand during high-volatility regimes, matching on VRP percentile alone would group sessions across vastly different absolute volatility regimes. Holding spot VIX constant isolates the relative richness of the premium at that specific VIX level.
Chapter 3
Cumulative Intraday Spike Probabilities
The Spike Probability Engine measures how frequently matched historical sessions touched specific point-expansion targets across three forward time frames: 5, 10, and 20 trading days.
1. Intraday "Touch" Logic
Breaches are registered the moment spot VIX touches or crosses a target price intraday. The model does not require VIX to close at or above that level.
Upward Targets: Triggered if the intraday High reaches or crosses the target.
Downward Targets: Triggered if the intraday Low reaches or crosses below the target.
This path hits the target early in the window and then closes lower than it started. The touch is what gets recorded, so the session still counts toward that level.
Execution Rule
Any intraday touch registers as a valid historical breach across all active forward windows (5, 10, or 20 days), even if VIX drops back down before the session close.
The Setup Log provides an audit trail detailing every individual historical trading session that matched both search parameters: the VRP Percentile Filter and the Spot VIX Level Filter.
The Columns
Column Header
Definition
Analytical Value
Date
Historical trading session timestamp.
Reveals how matched setups are distributed across historical macro regimes.
VIX
Closing spot VIX level on the matched session date.
Confirms starting point compatibility across matched records.
VRP
Spot VIX minus 6-month realized volatility on that date.
Displays the raw point spread behind the percentile match.
VRP Percentile
Rank of that session's VRP across the full dataset.
Confirms row alignment with the targeted VRP percentile range.
Highest VIX Move
Max intraday point expansion above entry across 5/10/20 sessions.
Supplies the underlying intraday move data used to calculate forward probabilities.
Interpretation Rules
"Never Went Higher": Indicates that spot VIX did not trade above its entry closing price at any point during the forward window.
Pending Status: Identifies recent historical matches whose 5-, 10-, or 20-session tracking windows are currently ongoing.
Spread Range: Because rows match on percentile rather than exact point values, the VRP column will show a range of raw point values.
Skew Evaluation: Comparing average peak moves against median peak moves reveals whether sample probabilities are driven by extreme tail events or consistent market behavior.
Example Skew Analysis
In this matched sample, the median peak 20-day move was +3.20 points, while the maximum peak move reached +41.44 points (from a March 2025 session). Sorting by the 20-day column isolates these extreme tail events.