Variance Risk Premium ScreenerImplied volatility, against what the stock actually does.
Options are, on average, priced for more movement than the stock goes on to deliver. That gap, implied volatility above realized, is the variance risk premium, and it is why selling options can have an edge at all. It is not uniform: it is wide on some stocks, gone on others, and sometimes reversed. This page explains how it is measured here and how the screener uses it.
What the variance risk premium is
An option's price implies a volatility: the amount of movement the market is paying for. Realized volatility is the movement that actually happens. Across equities, over long periods, implied has tended to sit above realized. The difference is the variance risk premium.
It exists because the two sides are not symmetric. Buyers of options, especially puts, are often hedging, and hedgers will pay above fair value for protection the way anyone pays for insurance. Sellers are compensated for carrying that risk, including the risk of a crash, when realized volatility jumps far above anything that was implied. The premium is positive most of the time because it is paid for the times it is not.
That last point is the one that matters. A positive variance risk premium is not free money. It is payment for bearing a fat left tail, which is why the screener reports tail losses and not only averages.
Measuring it for one stock
The screener compares two numbers:
- Implied volatility (IV), read from the stock's option chain at the money and interpolated to the tenor of the trade: 30 days for the nearer default expiry, 90 for the longer one.
- Realized volatility (RV30), computed from the last 30 sessions of daily prices with the Yang–Zhang estimator.
Their ratio, implied divided by realized, is the variance risk premium as a single number per stock:
| IV ÷ RV30 | Reading | What the screener does |
|---|---|---|
| below 1 | Options are priced below how much the stock is moving. The seller is underpaid. | Flags it and marks the trade Avoid. |
| around 1 | Priced about fairly against recent movement. | Ranks it low on the dominant measure. |
| above 1 | Options are priced above recent movement. | Ranks it higher. This measure carries 55% of the score. |
The ranking is relative. Each stock's ratio is turned into a percentile against the others in the same run, so the screen finds the richest premium on the board that day, even on a day when little is rich.
Why Yang–Zhang
The simplest realized volatility uses closing prices only, and it throws away most of what happened. A stock can swing 6% during a session and close unchanged. The Yang–Zhang estimator uses each day's open, high, low and close, so it captures both the overnight gap and the intraday range. It is also far more statistically efficient than close-to-close, which matters when the window is only 30 sessions long.
From a ratio to a price: richness
The ratio is measured at the money, and the option you sell usually is not. Implied volatility varies by strike: out-of-the-money puts on equities typically carry more implied volatility than at-the-money options. So the screener also prices the specific contract at realized volatility, which gives the value the option would have if the stock kept moving as it has. It compares that with the fill you are likely to get. The gap, as a percentage of that fair value, is what the screener calls richness.
In the risk-adjusted mode, a trade needs richness above 5% and a positive expected value to be called a Candidate.
When a high premium is not rich
The trap in all of this is the scheduled event. Before earnings, implied volatility on the front expiry rises because a large move is genuinely coming. Realized volatility over the last 30 sessions has not seen that move yet, so the ratio looks rich. It is not. It is the market pricing the announcement.
The screener catches this by comparing implied volatility at the trade's expiry with a later expiry, about three times further out. When the nearer one is priced above the later one, an inverted term structure, something dated sits inside it. The score is cut by up to 40 points depending on how steep the inversion is, and anything more than 20% inverted is flagged as event risk. For earnings it does not have to infer: it reads each company's next report date, and a report before the expiry makes the trade Caution and keeps it out of the shared Suggestions.
The limits. Realized volatility is backward-looking: it describes the last 30 sessions, not the next 30. A stock entering a new regime, such as a takeover, a guidance cut or a sector repricing, can make a rich-looking premium fair overnight. The variance risk premium is a tendency across many trades, not a forecast for any one of them.
Further reading
- Peter Carr and Liuren Wu, "Variance Risk Premiums", Review of Financial Studies, 2009.
- Dennis Yang and Qiang Zhang, "Drift-Independent Volatility Estimation Based on High, Low, Open, and Close Prices", Journal of Business, 2000.
Questions
Is the variance risk premium the same as IV rank?
No. IV rank compares today's implied volatility with its own past values. The variance risk premium compares implied volatility with how much the stock is actually moving. A stock can have a high IV rank and a negative premium, when options are expensive by their own history but the stock is moving even more.
Why 30 sessions of realized volatility?
It is recent enough to reflect how the stock is moving now and long enough to be a stable estimate. Implied volatility is read at the tenor of the trade: 30 days for the nearer default expiry, 90 for the longer one.
Can the variance risk premium be negative?
Yes. When a stock moves more than its options imply, the ratio falls below 1. The screener flags that and marks the trade Avoid, because the seller would be underpaid for the movement.
Does a high variance risk premium guarantee a profit?
No. It is compensation for risk, including the risk of a sudden large move. It has tended to pay across many trades and can lose heavily on any one of them, which is why the screener reports tail losses as well as averages.
See the variance risk premium on today's chains.
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