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Volatility Risk Premium
The volatility risk premium refers to the tendency for the volatility implied by option prices to differ from subsequently realized volatility, with implied volatility often incorporating compensation for bearing volatility risk.
Why it matters to you
Options do not merely reflect a neutral forecast of future movement. Their prices can include risk premia generated by supply, demand and investors' willingness to pay for protection or transfer risk. This is important for understanding why implied volatility and realized volatility do not need to match.