Abstract
Volatility isn’t just a measure of market fluctuations; it is the underlying asset of
a large number of tradable instruments. After a concise overview of the history
of volatility trading, this paper shows how individual investors can construct portfolios that aim to capture the volatility risk premium using nothing more than
VIX-linked exchange-traded notes (ETNs). We test four rule sets, beginning with
a constant short-volatility allocation and ending with a dynamically sized strategy
that responds to both the option-market premium and the slope of the VIX term
structure. Over 2008-2025, and after realistic costs, the final version compounds at
16.3% per year, delivers a Sharpe ratio of 1, and keeps equity-market correlation
near 15%. Blending even a modest slice of this strategy into a passive SPY portfolio
can lift the combined Sharpe ratio by 20%. We also outline how the rules can be
automated through a standard broker API. In conclusion, volatility trading is no
longer the exclusive domain of institutional hedge funds. With the right tools and
discipline, individual investors and systematic traders can now access and exploit
volatility-based strategies. However, one must always be mindful: volatility itself
is volatile—and should be handled with care.
Read paper from here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5316487