Strategy lab
Every strategy from 151 Trading Strategies and all 101 Formulaic Alphas as formulas you can edit and backtest on ten years of daily stocks, ETFs, futures, forex and crypto data. Free, in your browser.
7.4VolatilityPayoffImplied > realised
Volatility risk premium
Implied volatility is usually higher than the volatility that follows, so selling options earns a premium on average, with occasional large losses when markets sell off.
Note. The monthly roll prices options with the VIX, so it captures the gap between implied and realised volatility.
Write positions with S (the underlying), call(strike, months) and put(strike, months). Strikes are fractions of today’s price; negative signs mean short.
Hypothetical backtests on daily closes with no slippage unless you add costs. Survivorship bias applies: the stock list is today’s large caps. For learning, not investment advice. Data: Yahoo Finance via yfinance.
- Source
- 151 Trading Strategies
- Section
- 7.4 · Volatility
- Asset class
- Volatility
- In the lab
- Payoff and monthly roll
Volatility risk premium (7.4)
Implied volatility is usually higher than the volatility that follows, so selling options earns a premium on average, with occasional large losses when markets sell off.
Key equation
Lab formula
// Sell an at-the-money S&P 500 straddle each month
-call(1) - put(1)The monthly roll prices options with the VIX, so it captures the gap between implied and realised volatility.
How the option model works
Each leg is priced with Black–Scholes. For SPY the at-the-money volatility is 0.88 × the VIX, and a typical one-month S&P 500 skew makes out-of-the-money puts dearer and calls cheaper (0.9 volatility points per 1% of moneyness, flatter for longer expiries). Other underlyings use trailing realised volatility × 1.1 with no skew. The payoff chart shows profit at the first expiry and today. The roll backtest opens the structure at the close, marks it daily and reopens it at expiry. Bid–ask spreads are ignored, and they matter in practice.
More in Volatility
- 7.2 VIX futures basis trading
- 7.3 Volatility carry with two ETNs
- 7.3.1 Hedging short VXX with VIX futures
- 7.4.1 Volatility risk premium with gamma hedging
- 7.5 Volatility skew – long risk reversal
- 7.6 Volatility trading with variance swaps
Source: Kakushadze, Z. and Serur, J. A. (2018). 151 Trading Strategies. Palgrave Macmillan. SSRN 3247865. Summaries are our own.