Volatility risk premium (VRP)
The persistent tendency of implied volatility to exceed subsequently realized volatility. It is the compensation option sellers earn, on average, for insuring buyers against large moves — positive most of the time, sharply negative in crises.
The VRP is one of the most robust findings in empirical finance, documented across equity indexes, rates, currencies, and commodities. Its economic logic is insurance: hedgers pay for certainty, and someone must be paid to bear the tail.
Harvesting it is a legitimate business with an honest cost — occasional deep drawdowns concentrated exactly when everything else is falling. Every strategy on this site that sells premium is, knowingly or not, a VRP strategy, and should be sized like one.
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