← AdvancedLesson 6 · 3:28
What is the volatility risk premium?
Summary
You can define the volatility risk premium: implied volatility, measured by the VIX, sitting above the volatility that actually came, on average. You can explain it as insurance pay for carrying crash risk, and why selling volatility is never a sure income.
Key terms
- realized volatility
- How much a stock actually moved, measured from its daily moves as a yearly percentage.
- volatility risk premium
- The gap by which implied volatility sits above the volatility that actually came, on average, paid to sellers for carrying crash risk.
Check yourself
Answer each question to see why the right answer is right.
1. In this lesson, what is realized volatility?
2. Across 9,252 trading days from 1990 to 2026, how often was the VIX higher than what came?
3. The VIX averaged about 19 and what came averaged about 15. What is that gap of about 4 points called?
4. The lesson compares option pricing to house insurance. In that picture, who is paid the premium on average?
5. When the days are lined up from best to worst for a seller, what do the losing days look like?
Finished the video and the quiz? .