By Brett Friedman, Winhall Risk Analytics/OptionMetrics Contributor
Wars in the Mideast and Ukraine, oil prices up sharply year-to-date, continued tariff and trade uncertainty, a private credit mini-meltdown, rumblings about an AI bubble, and economic uncertainty at record levels—any one of these could lead to the conclusion that we should be experiencing sharply higher volatility like that seen during extreme financial crises.
Before the outbreak of the war in Iran, it seemed as though perceptions of increased volatility—especially those portrayed in the press and social media—were not supported by traditional volatility metrics such as a sustained rise in negative daily returns, higher volatility risk premiums, or a persistent jump in the VIX.
How has the war changed the volatilty picture? The answer is not that obvious and has implications for current VIX levels.
To find out, we compared the VIX index, 21-day historical (realized) SPX volatility, and the volatility risk premium (known as VRP or the difference between market expectation of future volatility versus actual volatility) for the periods before and after the war started (01/02/2025 – 02/27/2026) versus 03/02/2026 – 06/03/2026. In this case, we defined the volatility risk premium as the VIX minus 21-trading day realized volatility. Since the VIX (implied volatilty) is forward-looking and historical volatilty only looks backward, the VRP can sometimes produce useful insights on how the market is pricing risk and downside insurance.
Below is a chart comparing the three metrics over the two periods in question:
Source: OptionMetrics
Although the VIX (blue/red line above) has pulled back from its mid-March highs, its average and median levels are still higher than in the pre-war period. In addition, the VRP (lower panel above) is also higher as is on average almost twice that of the pre-war level:
Metric | 01/02/25 – 02/27/26 | 03/02/26 – 06/03/26 |
VIX Median | 17.21 | 18.90 |
VIX Average | 18.77 | 20.79 |
VRP Median | 5.25% | 6.48% |
VRP Average | 3.47% | 6.87% |
Source: OptionMetrics
On a longer-term basis, arranging the VIX into quintiles since 1996 provides another indication that the current VRP is abnormally high compared to not only the previous period but to its long-term average and median levels:
VIX Quintile | VIX Range (%) | Median VRP (%) |
1 | 9.14 – 13.76 | 3.32% |
2 | 13.77 – 16.80 | 4.11% |
3 | 16.81 – 20.34 | 4.75% |
4 | 20.35 – 24.92 | 4.75% |
5 | 24.93 – 82.69 | 5.19% |
Source: OptionMetrics
The VIX has primarily been in the upper quintiles since the war began. The recent VRP of 5.60 (06/03/2026) is significantly higher than the medians for both those quintiles, indicating that options are pricing in high levels of risk and uncertainty. Unless war-related uncertainty eases, the risk premium is likely to stay elevated, implying that today’s relatively moderate VIX should not be mistaken for calm.
For more insights on futures options, the options markets and volatility, visit the OptionMetrics blog.
There is an inherent risk involved with financial decisions. The information in this article is for informational purposes only and is not intended to provide financial advice. Views expressed are those of the author(s) and are not necessarily those of the company.
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