The Volatility Risk Premium: An Empirical Study on the S&P 500 Index

Abstract

We perform an empirical analysis of trading strategies based on the systematic selling of delta hedged options, aiming at capturing the so-called volatility risk premium. We compare the performance across different strikes and maturities, and perform a breakdown of the drivers of performance. We also examine how such strategies can be combined to extract other premia related to the profile of the volatility surface, e.g. the skew and the term structure. In this first paper we focus on the S&P 500 index over the period 2010–2018.

Keywords: systematic strategies, derivatives, risk premium

JEL Classification: G11, G13, G14, C00