The VIX Almost Always Overstates Actual Volatility
VIX (implied) vs. 30-day realized volatility on the S&P 500
The VIX has historically traded at a premium to subsequently realized volatility approximately 85% of the time. This variance risk premium is the reason selling options has been a profitable strategy — but the 15% of the time it undershoots, the losses are enormous.
What history says
Editorial commentary written by ALAN analysts. Figures cited below are analyst-authored context — they are not derived from the chart above and may reflect different windows or sources.
On average, VIX overstates subsequent realized vol by 3-5 points. This premium compensates option sellers for bearing tail risk — it is the 'insurance fee' the market pays.
Covered call and put-writing strategies harvest the variance risk premium. They underperform in sharp rallies but outperform in flat or mildly declining markets.
The 15% of periods where realized vol exceeds implied vol are concentrated in 2008, 2020, and 2022. These are the periods that blow up short-vol strategies.
If you run option-income strategies such as covered calls, recognize you are collecting an insurance premium that pays steadily and occasionally pays out badly — size those sleeves so a 2008- or 2020-style episode is survivable rather than ruinous. If instead you buy protective options, budget them like insurance: the premium will usually be a cost, not a return source.