Quantifying the Variance Risk Premium in VIX Options

18 Pages Posted: 12 Jan 2012

See all articles by Amir Barnea

Amir Barnea

HEC Montreal

Reed Hogan

Claremont McKenna College

Date Written: January 11, 2012

Abstract

This paper uses synthetically created variance swaps on VIX futures to quantify the variance risk premium in VIX options. The results of this methodology suggest that the average premium is -3.26%, meaning that the realized variance on VIX futures is on average less than the variance implied by the swap rate. This premium does not vary with time or the level of the swap rate as much as premiums in other asset classes. A negative risk premium implies that VIX option strategies that are net credit should be profitable.

Keywords: Variance risk premium, VIX, Options

Suggested Citation

Barnea, Amir and Hogan, Reed, Quantifying the Variance Risk Premium in VIX Options (January 11, 2012). Journalof Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1983528

Amir Barnea (Contact Author)

HEC Montreal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7321 (Phone)
514-340-5632 (Fax)

Reed Hogan

Claremont McKenna College ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

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