Volatility Risk Premium - an Amateur's Foray

Here is a post I did a while back on the volatility risk premium on LinkedIn Pulse (Volatility Risk Premium - An Amateur's One Year Foray Into an Alternative Risk Capture Experiment) .  I do less of this than I did at the time of the post but I do continue to dabble.  I view volatility as a credible alternative risk premium that can be accretive to one's efficient frontier.



A quote from AQR on Vol risk:

Many investors focus a great deal on trying to maximize their upside participation while minimizing their downside risk. Options arguably provide the most direct downside hedge, but often at a significant cost, reflecting investor preferences. This cost, commonly referred to as the volatility risk premium and measured by the difference between the option’s implied volatility and its underlying asset’s realized volatility, is compensation paid by option buyers to sellers for bearing undesirable downside risk. The size of the volatility risk premium is related to investors’ asymmetric risk preferences. …Data and economic theory suggest that investors who attempt to deal with downside risk by being long options should expect to underperform. On the other hand, those who seek out downside risk exposure by selling options should expect to outperform for the same reason. Embracing Downside Risk, AQR 2015.