The volatility risk premium in the oil market

This article provides a comprehensive analysis of the volatility risk premium (VRP) in the oil market. We approach the problem from the practitioner's perspective as an investment strategy that sells and delta-hedges oil options, paying particular attention to the strategy's risk-adjusted returns and its drawdown characteristics. The results are differentiated across options with different moneyness and expirations and presented in the form of VRP smile and VRP term structure. Strategy results are analyzed using alternative delta-hedging techniques that vary hedging frequencies, hedging thresholds, and volatilities used to calculate options' delta. We discuss the performance under different regimes and highlight the structural break driven by the changing behavior among main participants in the oil options market.