Illustrative article · Sample editorial content and publication date, prepared for this website. Not a disclosure of proprietary research.
Two measures of the same thing
Implied volatility is read from option prices: it is the volatility that makes a pricing model agree with the market. Realised volatility is measured afterwards, from the returns that actually occurred. One is a price set in advance, the other is an outcome, and they are rarely equal.
A premium for bearing risk
In many index markets, implied volatility has on average been higher than the realised volatility that followed. The gap is often described as a volatility risk premium: a payment option buyers make for protection against large moves. It is an average, not a guarantee, and it can reverse sharply when markets fall.
Premium and payoff
A strategy that sells options collects that premium in most periods and pays out in a few. Its record depends on sizing, on how losses are bounded, and on the range of conditions it has been tested across. Studying the full distribution of outcomes, rather than the average, is what makes the premium understandable.