The Variance Risk Premium in NIFTY Index Options: Smaller than It Looks, Priced in the Wings, and Paid for Tail Risk

This research measures the variance risk premium in NIFTY 50 index options using two horizon-matched measures. India VIX exceeds the realised volatility of the following 30 calendar days by 3.26 volatility points on average over 2008–2026, and on 82% of days. For weekly options over 2020–2026, at-the-money implied volatility exceeds the volatility realised until expiry by 2.22 points. This is less than half the gap obtained when the overnight returns in the same windows are ignored, because overnight moves carry 42% of realised variance. Model-free implied volatility exceeds at-the-money implied volatility by 2.16 points, so much of the premium sits in out-of-the-money options. Implied volatility is a biased forecast of realised volatility. Selling weekly volatility earned positive average returns net of costs, but only a short strangle cleared zero after correction for multiple testing. Five weeks erased 64% of a short straddle's cumulative gain. The premium is real, smaller than a naive measure suggests, and largely compensation for tail risk. JEL codes: G12, G13, G14. This is research, not investment advice.