What is the most stable profit model in the options market? VRP (Volatility Risk Premium) could be one of the answers.
This indicator seems simple (implied volatility minus actual volatility), but it hides the most fundamental game rules of the market: people always pay excessively high premiums for 'panic'.
Just as people who buy fire insurance always think their house will catch fire, stock investors always believe there will be a surge or crash tomorrow. This collective anxiety allows options sellers to become collectors of the 'panic tax'.
For example, during the stock market circuit breaker in March 2020, the implied volatility of S&P 500 options surged to 85%, while the actual volatility was only 60%, resulting in a VRP of 25%. Those who calmly sold panic options earned premiums in one month equivalent to six months of regular earnings.
Practical Approach to Harvesting VRP
Beginner's Play: Build Your 'Panic Tax' Assembly Line
Sell at-the-money call and put options (straddle) while buying deep out-of-the-money put options as 'insurance'. For example, when the S&P 500 index is at 4000 points, sell a straddle at the strike price of 4000, and then buy a put option at the strike price of 3400.
The logic of this strategy is to cover the most extreme black swan events (such as a 15% market crash) with out-of-the-money options, while steadily pocketing the volatility premiums in the middle range. It's like running a casino — allowing someone to hit the jackpot occasionally, but ensuring long-term profitability is unlikely.
Advanced Play: Volatility Timing
When VRP surges (such as before earnings season or during geopolitical tensions), the market is like a startled bird. At this point, selling a straddle is comparable to selling 'lifebuoys' at high prices when the crowd is most panicked.
Before NVIDIA's earnings report in 2023, the implied volatility of options was 40% higher than the actual value, and it was later proven that the stock price volatility was far below expectations, resulting in sellers earning 30% in premiums over two days.
Avoid those pitfalls: The Dark Forest Law of VRP Trading
Trap 1: Treating VRP as a perpetual motion machine
Many people think that as long as the VRP is positive, they can mindlessly sell options, but they encounter the flash crash of the British pound in September 2022 — implied volatility doubled in one day, and actual volatility broke through all models.
The solution is to always keep an 'escape route'. My habit is to keep positions no more than 10% of total capital, and I must pair it with at least 10% out-of-the-money protective options. Just like using a safety rope while walking a tightrope, you can perform boldly, but won't fall to your death.
Trap 2: Being obsessed with short-term volatility predictions
Trying to predict who will have higher implied or realized volatility tomorrow is essentially no different from flipping a coin. Those who truly make money only do one thing: focus on long-term statistical advantages.
Data does not lie. Over the past 20 years, the probability of positive VRP for S&P 500 options has exceeded 70%, averaging 0.8% excess returns each month. This is equivalent to the market giving you a 'panic bonus' every year; all you need to do is reach out to catch it, rather than guessing how much is inside the bonus.
From Bronze to King: Three Stages of VRP Thinking
Learn to see through the lies of volatility
Don't let the news of 'volatility surging' scare you into paralysis. Open your trading software, overlay the IV and RV curves — when the two lines diverge, it's your moment to enter and harvest.
Use hedging to resolve human greed
Many novices sell naked put options with all their capital, leading to a direct account wipeout when there is a single-day drop of 7%. Now every trade I make carries a 'hedging gene': selling at-the-money options for premiums while buying out-of-the-money options to prevent crashes. It's like going into battle armed with both a spear and a shield, controlling the rhythm of attack and defense.
Transform VRP into a volatility arbitrage network
Truly top players have long jumped out of a single market. For instance, in the third quarter of last year, a trader discovered that the VRP of crude oil options had dropped to negative, while the VRP of U.S. stocks remained high, so they immediately reduced their U.S. stock positions and turned to long crude oil volatility. Two months later, as the Russia-Ukraine conflict escalated, crude oil volatility surged by 300%, and this operation directly contributed to 60% of the annual profit.
In short, the market always rewards rational traders. The most fascinating aspect of the VRP indicator is that it turns human weaknesses into quantifiable numbers. While others scream for price rises and falls in front of the screen, you simply need to calmly calculate the difference between implied and actual values — a 0.5% premium difference could be the galaxy between a novice and an expert.
Next time you trade, ask yourself: 'Is the current volatility pricing a bubble of panic emotions, or the result of rational assessment?' Once you figure out this question, you've touched the pulse of sustainable profitability.
