Since late 2016, the VIX has priced more volatility than the S&P 500 then delivered on 84% of days. That gap is the volatility risk premium. It is real, and it is not free.
How to read it
Each day, compare the VIX, the 30-day volatility priced by the options market, with the volatility the S&P 500 actually realised over the next 21 trading days. The window runs from October 2016 to October 2026.
The premium
Over the period, the VIX averaged 18.7 and realised volatility 15.0: a premium of 3.7 vol points. The VIX came in above the volatility that followed on 84% of days. Plotted day by day, the gap is a small positive premium most of the time, broken by a few deep negative spikes.
The other 16%
20 February 2020: VIX 15.6, realised 87.5 over the next 21 sessions. 25 March 2025: VIX 17.2, realised 48.3. 26 January 2018: VIX 11.1, realised 25.7.
The asymmetry
In February 2020, realised volatility beat the VIX by 72 points, against an average premium of 3.7. Misses of more than 10 points happened on only 3.3% of days. They are rare, and each one can wipe out years of premium.
What it means
Selling volatility is selling insurance: small regular premiums, and a few weeks that cost years of them. Buying volatility is the mirror image: a slow bleed, and a few weeks that pay for it.
What I kept
The premium is real, so is the bill. At ARTE Group, we size for the worst month in the data, not for the average one.
Data: VIX and S&P 500 closes from FRED, own calculations. The same idea runs through my first letter, Why I read the price of insurance first.
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