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VRP Analysis Tool

What is the VRP Analysis Tool?​

The VRP Analysis is a powerful tool that helps you understand market‐volatility dynamics and make informed options‐trading decisions. It shows the difference between what the market expects volatility to be (Implied Volatility) versus what actually happens (Realized Volatility).

Quick example
If the market predicts NIFTY will be volatile at 18 % over the next 30 days, but it actually moves at only 15 %, there’s a 3 % premium built into option prices.
This 3 % gap is the Volatility Risk Premium (VRP).

Getting Started​

1. Access the VRP Dashboard​

  1. Log into AlgoTest to access the VRP analysis tool:

VRP Dashboard

  1. Navigate to Builder + Simulator:
    VRP Dashboard

  2. Click on the VRP Analysis to access the dashboard: VRP Dashboard

  3. Click on the VRP Analysis and you will finf the main dashboard interface appears with charts and settings like this: VRP Dashboard

2. Select the Asset​

Choose an index from the dropdown as shown in the image, for example:

  • NIFTY – broad-market analysis
  • BANKNIFTY – banking-sector volatility

VRP Dashboard

3. Configure the Settings​

Implied Volatility (IV) Settings

  • Constant Maturity: 7 d, 21 d, 30 d, or 90 d
    • Normalises for changing expiries so you can track true shifts in market expectations.

VRP Dashboard

Realized Volatility (RV) Settings

  • Look-back Period: Match this to your IV choice (e.g., 30 d IV → 30 d RV)
  • Estimator: Integrated (recommended), Parkinson, Garman-Klass, or Yang-Zhang
  • Lag RV: Aligns prediction dates (IV) with outcome dates (RV)

Understanding the Dashboard​

The Main Chart​

  • Blue line (IV): Market’s volatility prediction
  • Red line (RV): Actual volatility that occurred

Example Walk-Through​

  1. Set IV to 30 d – market’s 30-day forecast
  2. Set RV to 30 d + Lag – realised volatility 30 days later
  3. Reading: IV = 22 %, RV = 18 %
  4. VRP: 22 % – 18 % = +4 %
  5. Interpretation: Options are relatively expensive → volatility-selling strategies may be attractive.

Advanced Features​

Distribution Analysis​

A distribution table shows:

  • Frequency of positive vs. negative VRP
  • Average VRP across different IV regimes

VRP Dashboard

Multiple RV Estimators​

EstimatorBest For
IntegratedTrend-heavy markets (removes price drift)
ParkinsonCapturing intraday volatility (high-low)
Garman-KlassComprehensive OHLC measure
Yang-ZhangAccounts for overnight gaps

Best Practices​

  1. Match Time Horizons

    • 30 d IV ↔ 30 d RV, 7 d IV ↔ 7 d RV

  2. Use Lag RV for Predictive Analysis

    • Aligns forward-looking IV with backward-looking RV

  3. Consider Market Context

    • Normal markets: VRP positive ~ 80 % of the time
    • Crisis periods: VRP can turn negative as RV spikes
    • Event risk: Earnings, policy meetings, etc.

  4. Combine With Other Analysis

    • VRP is descriptive, pair it with technicals, sentiment, and risk management.

Frequently Asked Questions​

Q: Why is VRP usually positive?
Markets overprice volatility as insurance against uncertainty; investors pay a premium for protection.

Q: When might VRP turn negative?
During shocks, sudden news, or volatility clustering (high-volatility periods that persist).

Q: How often should I check VRP?
Daily for planning; intraday during high-impact events (e.g., earnings, policy announcements).

Q: Does VRP apply to every options strategy?
It’s most useful for volatility-focused strategies; for directional trades, combine it with price and trend analysis.

Q: Where can I learn more about IV, RV and VRP Dashboard?
AlgoTest's goal is to educate traders, hence we have launched a course on Volatitlity Trading for traders like you. Check it out here.