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Selling SPX Options to Capture the Variance Risk Premium

Article Quant Q&A · Author: Franc
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Summary

The document explains the idea behind selling options to collect the variance risk premium in the S&P 500. It describes a common pattern in which implied volatility is often above subsequently realized volatility, making options appear expensive relative to their eventual movement. A seller seeks to benefit from that pricing difference; the question mentions out-of-the-money bull put spreads as one implementation.

The explanation is conceptual and offers no trade construction details, sample period, performance data, or risk analysis. The claim about implied volatility exceeding realized volatility is qualified as occurring most of the time and in the SPX context, not as a guarantee for an individual trade or future market. Option selling can still lose money when realized moves or changes in implied volatility are adverse, and the document does not quantify those exposures or address how a spread limits them.

Key ideas

  • The variance risk premium refers to a tendency for implied volatility to exceed realized volatility.
  • Selling options can seek to collect compensation for this difference in implied and realized volatility.
  • Out-of-the-money bull put spreads are cited as one way to express the position.
  • The explanation provides no evidence, trade rules, or risk estimates for the strategy.

Tags

OptionsVolatilityRisk management
Full text
# Short the difference between implied volatility and realized volatility of SPX


# Short the difference between implied volatility and realized volatility of SPX












A professional trader said that the way is not to short VIX or other volatility products, but to short the difference between implied volatility and realized volatility of SPX This has to do with VRP Variance risk premium but what means selling the difference? The pro trader trades OTM bull put spreads in SPX. It is not clear to me. Thanks.

## Answer by Frank Kaiser (score 2)

https://quant.stackexchange.com/a/63160

If implied volatility were always identical to realized volatility your average profit over many option trades would be exactly zero.

But in reality implied volatility most of the time is higher than realized volatility (at least in SPX). That is the same as saying Options market prices are most of the time higher than their fair value.

If something is more expensive than it's fair value you would try to sell it to make a profit. That's exactly what your professional trader does.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.