VOL-10 · Volatility

Volatility Risk Premium

Volatility Risk Premium (VRP) is the difference between implied and realized volatility. When VRP is high (implied > realized), sell volatility by holding the underlying. When VRP is negative, stay out as markets may be turbulent.

VolatilityRisk PremiumStatistical

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At a glance

Best onEquity markets with VRP

Signal frequencyDaily

Typical holding periodDays to weeks

Asset classesIndex

Markets tested10

Data through2026-11-10

What the backtest shows

Beat buy-and-hold on 3 of 10 markets by annual return over 5 years.
Had a smaller maximum drawdown than buy-and-hold on 9 of 10 markets.
Best market by Sharpe ratio: DBC (Sharpe 1.07, CAGR 12.6%).
Weakest market: EURUSD=X (Sharpe -0.69, CAGR -4.4%).
Few or no trades in the window on UNG — treat those rows as a sign the rules rarely triggered, not as an edge.

Equity curve

Volatility Risk Premium Buy & hold · SPY, 2010-01-04 → 2026-11-10, growth of 1

Score and risk profile

Arena Score: 53.4SPY, 5 years

Return quality · 30%41

Drawdown control · 25%47

Consistency · 20%56

Robustness · 15%64

Significance · 10%84

Each bar is a percentile against every strategy on the same market and window (100 = best).

Time in market57%

Ulcer index5.9%

Longest drawdown606 days

Daily VaR (95%)-1.19%

Probability Sharpe > 084%

Beta vs buy & hold0.38

Alpha (annual)+0.0%

Positive months55%

CAGR after 10 bp costs1.5%

Deflated Sharpe (luck-adjusted)32%

CAGR, 90% bootstrap range-3.6% to 11.5%

Max drawdown, 90% bootstrap range-30.8% to -10.2%

How it held up in sell-offs (SPY)

Period	Strategy	Buy & hold
Q4 2018 sell-off	-18.7%	-19.2%
COVID crash (Feb–Mar 2020)	-4.7%	-33.7%
2022 bear market	-8.9%	-24.5%
Market above its 200-day average (annualized) · 81%	+4.9%	+12.5%
Market below its 200-day average (annualized) · 19%	+5.8%	+19.8%

Sell-off dates follow the US stock market. Above/below the 200-day average uses the previous day's position, so there is no look-ahead.

Out-of-sample check (SPY)

Check	Value
Chosen parameters on their 3-year training windows (average Sharpe)	0.93
Same parameters in the following 6 months, when traded (Sharpe)	0.62
Default parameters over the same months (Sharpe)	0.82
Parameter re-selections / changes	28 / 11
Parameter settings with a positive Sharpe (full history)	9 of 9
Sharpe across settings: worst / median / best	0.48 / 0.68 / 0.81

Out-of-sample periods start on 2013-01-04. Training-window figures are flattered by picking the best of 9 settings; the out-of-sample figure is what the strategy actually earned. A large drop, or a result that depends on one setting, points to overfitting. How walk-forward testing works.

Results by market (5 years)

Market	CAGR	Buy & hold CAGR	Sharpe	Max drawdown	Buy & hold max DD	Volatility	Arena Score
DBCInvesco DB Commodity Index	12.6%	10.8%	1.07	-17.5%	-27.3%	11.8%	84
USOUnited States Oil Fund	7.5%	20.2%	0.76	-12.2%	-36.2%	10.2%	64
DBAInvesco DB Agriculture	3.8%	8.8%	0.43	-14.5%	-15.9%	10.1%	58
SPYSPDR S&P 500	4.3%	11.6%	0.43	-14.4%	-24.5%	10.7%	53
SLViShares Silver Trust	3.5%	15.2%	0.36	-32.2%	-57.8%	12.9%	48
GLDSPDR Gold Shares	3.6%	16.4%	0.35	-25.4%	-28.3%	12.7%	32
BTC-USDBitcoin	0.7%	2.6%	0.10	-19.7%	-75.9%	9.3%	50
ETH-USDEthereum	0.0%	-15.1%	0.05	-25.3%	-79.0%	8.9%	—
UNGUnited States Natural Gas	-0.8%	-30.7%	-0.45	-3.9%	-93.3%	1.8%	—
EURUSD=XEUR/USD	-4.4%	-0.7%	-0.69	-22.4%	-17.2%	6.1%	14

Strategy metrics use daily returns without trading costs. Buy-and-hold figures are for the same market and window. Rows are sorted by Sharpe ratio.

SPY across time windows

Window	Total return	CAGR	Sharpe	Sortino	Max DD	Win days	Trades
1 year	+6.8%	6.8%	0.92	1.09	-4.9%	30%	28
3 years	+34.8%	10.5%	1.12	1.16	-8.2%	35%	83
5 years	+23.3%	4.3%	0.43	0.45	-14.4%	30%	139
Full history	+129.1%	5.0%	0.55	0.54	-18.8%	31%	422

Rules

Entry

VRP > threshold (implied > realized)

Exit

VRP < 0 (realized catching up)

Indicators

Realized Vol = Std(returns) * sqrt(252)
Implied Vol proxy = Recent vol range
VRP = Implied - Realized

Inputs

Realized_Lookback = 20
VRP_Threshold = 0.02

Position sizing

Fixed 100% allocation

Risk controls

Exit when VRP turns negative

Strategy evidence

Only available, validated bundles appear below. Missing evidence is not a passing validation result.

Evidence coverage

10 / 10 declared strategy–market pairs validated

Notes

VRP is typically positive (variance risk premium)
High VRP = market calm, good to hold
Negative VRP = turbulence ahead

Related strategies

COMBO-01 · SPY 5Y Sharpe 0.03Bollinger-Keltner Squeeze CS-02 · CS-UNIV 5Y Sharpe 0.97Low Volatility Rotation MOM-06 · GLD 5Y Sharpe 0.57Residual Momentum MR-02 · SPY 5Y Sharpe 0.39Bollinger Band Reversion MR-03 · SPY 5Y Sharpe 0.25Kalman Filter Mean Reversion MR-04 · SPY 5Y Sharpe 0.24Ornstein-Uhlenbeck Mean Reversion

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Backtests are historical simulations on daily data and do not include commissions or slippage. They do not guarantee future results and are not investment advice. See the methodology for how every strategy is tested.