Volatility Risk Premium (VRP) 1.0

The Volatility Risk Premium (VRP) 1.0 indicator calculates the one-month Volatility Risk Premium for the S&P 500 and Nasdaq-100, providing traders with a quantitative measure of market sentiment and hedging activity.

Usage

The Volatility Risk Premium represents the difference between Implied Volatility (IV) and Realized Volatility (RV). It reflects the cost market participants are willing to pay for portfolio insurance.

• Normal Range: When the VRP line fluctuates within the "normalized" range (one-year moving average +/- a user-defined percentage), market uncertainty is considered standard.
• High Premium: A VRP above the normalized range indicates that investors are paying a significant premium for options, signaling heightened uncertainty or fear of a market crash.
• Low/Positive Premium: A VRP below the normalized range but above the zero line suggests that investors perceive decreasing risks, though they are still paying a small premium for protection.
• Complacency: A negative VRP (below the zero line) indicates market complacency, where participants expect future volatility to be lower than the volatility realized in the recent past.

Details

The indicator utilizes 30-day Implied Volatility (IV) derived from the VIX (for SPX) and VXN (for NDX) indices, compared against 21-day Realized Volatility (RV). Realized Volatility is calculated as the annualized standard deviation of logarithmic returns based on daily closing prices.

The VRP is expressed as a percentage: 100 * (IV - RV) / RV.

Note that because volatility index data from the CBOE may be delayed on certain platforms, the calculation might reflect these delays. The indicator is specifically calibrated for use on the daily timeframe.

Settings

• S&P500: Toggles the visibility of the VRP calculation for the S&P 500 index.
• Nasdaq 100: Toggles the visibility of the VRP calculation for the Nasdaq 100 index.
• Normalized range %: Sets the percentage bandwidth around the 1-year Simple Moving Average used to define the "normal" volatility environment.

FAQ

How do I use this on different timeframes?

This specific indicator is calibrated for the daily timeframe to match the 30-day IV and 21-day RV calculation logic.

Why is the chart blank when I first add it?

You must enter the settings menu and select at least one index (S&P 500 or Nasdaq 100) to begin plotting the VRP data.

How can I access Volatility Risk Premium?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.