This article was originally published in The Option Strategist Newsletter Volume 24, No. 8 on April, 23 2015.
One of the most successful investment strategies practiced by hedge funds (and other sophisticated investors) in the last ten years has been the “volatility short” trade. It is rarely mentioned on TV or in the media, but that is not too surprising. They would rather promote things such as the “Japan carry trade,” which wasn’t necessarily a profitable strategy at all unless a great deal of risk was taken. Not to say that the “volatility short” didn’t have its own share of risk, but it’s a lot more certain to profit if a certain status quo is maintained.
In this article, we’ll look at the history of the “volatility short” trade and see where it stands today. The long-term perspective on this trade may be a bit surprising, for it shows the tremendous toll that the $VIX futures premium takes on a long volatility position.
