Glossary

Variance risk premium

also: variance premium · vrp

The tendency of implied volatility to sit above the realised volatility that follows it. It is an observed feature of most option markets and it is the reason option writing is often described as being paid to carry risk. It is a statement about two volatility measures and nothing more: whether any particular structure converts that gap into a result depends on the path the index actually takes and on what the position costs to open and to close.