An Update on the Volatility Risk Premium (VRP)

Our April Market Perspective focused on how the Volatility Risk Premium (VRP) has changed over time and noted that its first quarter of 2020 inversion reached record-setting levels in February. VRP has been positive since mid-March, and averaged 14.23 from March 17 through April 28, i.e. the 21-day1 realized volatility period ending May 27.

The VRP average since March 17 is nearly three times the average positive VRP reading since September 2008 and, as the longer-term chart shows, recent VRP readings are the highest since December 2008. Writing index options in this environment has strong potential for enhancing risk-adjusted returns while achieving a lower-risk profile than the broader equity market.

* Source: Bloomberg, L.P.

1Equity and index option markets are open approximately 21 days per month, on average.