Strategies · Core
Volatility Risk Premium Effect
Sell implied volatility and buy realized — harvest the gap that insurance buyers pay, with a jump left tail.
Definition
Typical recipe: short index variance or a delta-hedged straddle/strangle, or sell futures vs a realized proxy. Collect carry when realized < implied. Hedge or size for the crash. Not the same as a covered-call overlay, though both are short vol.
Why it matters
It is one of the largest derivatives premia. It is also how books blow up in 2018 Volmageddon and 2020 Q1.
Case
A short-vol sleeve that looked Sharpe 2 until February 2018. The premium was real; the sizing assumed no jump.
How to read it
Instrument (varswap, VIX futures, options), hedge, and a hard loss limit. Do not quote the carry without the 99th percentile day.
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