Volatility Premium

Every day, the options market prices in how much it expects U.S. equities to move over the next thirty days. With hindsight, we can then measure how much they actually moved. The Volatility Premium is the difference between the two: how much investors are paying today to insure against future volatility, relative to how much volatility has actually been realized.

Historically, this premium has been positive roughly 85% of the time — the market tends to pay slightly more than necessary for protection, and it is this margin that makes selling volatility profitable on average over time. But the interesting part is not the average; it is when the premium moves significantly away from it. A very compressed or negative premium indicates that realized volatility has caught up with or exceeded expected volatility — a typical sign of stress that is already underway. A very wide premium indicates the opposite: the market is paying a high price for protection against a risk that, for now, has yet to materialize.

This is not a one-directional reading like health scores, where a higher value always means better health. Here, the two extremes tell different stories depending on the context in which they occur — which is why we publish it as a contextual signal, never as a forecast.