Instructive article!

nice article

Thank you, glad you found it helpful!

Excellent!

But besides VIX and related futures/options, which are tiny by themselves, one has to go OTC for something with depth.

Sorry to disagree with the group. This article is nothing more than promotional material for a hypothetical trading strategy. If you want to invest in Volatility based strategies, there are plenty of CTAs who can be of service to you. These CTAs will have real data based on years of trading customer's accounts instead of hypothetical data based on back-test.

Wei, to answer your question, the most effective way to trade Volatility, I my opinion, is by selling and buying S&P Options (although I prefer selling). The article did correctly mentioned that correlation of VIX to S&P is about -0.8 so one can utilize different options strategies to take advantage of VIX fluctuations and it's impact on option pricing. That said, there is a lot more one would need to learn before committing funds to options strategies in leveraged products (S&P Futures), so utilizing professional help is probably the best way to go.

Hope, I did not offend anyone. This was not my intend.

You can find a lot more on CTA industry on CME's website.

Just a quick addition. I just re-read my comment and it is a little harsh, was not meant to be. Jason, the theory behind this article is absolutely correct, so thank you for sharing it. If you are utilizing similar strategies in real trading you may already be making money on something many people pass due to high volatility. However, be aware of hypothetical strategies since there are many pitfalls in real-life trading which will be lost on you by just looking at past performance.

Thanks for your comment, Miachael - no offense was taken. Totally agree that people should be cautious of hypothetical strategies as they do not always work logistically in real-life. However, I have personally been trading this strategy live for some time, with strong results. Much care was taken to ensure that the strategy would still be sound in a live trading environment.

And I agree - the best way to DIRECTLY trade volatility is with S&P 500 options. The downside is that you cannot take advantage of the shape of the futures curve (this is why VIX Strategies uses both S&P 500 options and ETNs based on futures). Thanks again for your comment.

Hi Jason, glad to hear this strategy his positive real life results. That is great. Too few people take advantage of volatility trading and it has a lot to offer. These guys did not provide much info on what the strategy actually is without paying for it (I think they offered a 30 day trial), so I definitely could not objectively evaluate it, but I am generally skeptical of strategies offered on subscription basis. Despite various claims of trying to help wider population, they usually are more profitable for people selling the strategy vs. those using it.

I am glad it works for you, so continue to make $$ as long as it does. Just do keep in mind that VOL strategies have a low percentage of high losses. So please make sure that your amount at risk well understood and that you can psychologically handle the loss. Otherwise, I strongly believe that VOL trading offers much better opportunity than directional trading of any product. Check out this paper (or book based on the size), it may give you additional ideas --> http://wwwf.imperial.ac.uk/~ajacquie/IC_Volatility/IC_Volatility_Docs/Literature/Bennett.pdf

Yes, agreed - as with any investment/trading, you should be aware of both the risks and rewards. I am well aware of the drawdowns (often quite extreme on a monthly basis), and am prepared both mentally and financially to handle the drawdowns. Only risk capital is used, and I will be in this strategy for the long-term. Thanks for the paper/book - looks like a lot of really great info!

One of an interesting (and challenging) issue in the QE environment trading volatility is that the mean reversion behavior has been (maybe forever) changed by central banks. Both SPX and VIX has shifted towards bi-modal distribution over the past several years, making estimating of correlation and interpreting results a futile effort. Anyone shares the same thoughts or disagrees?

At the risk of becoming a nay sayer, I respectfully disagree again :-). I have been trading volatility since 2005 and I do not see many differences in VIX behavior between 2003 - 2007 cycle and 2010 - 2015. My version of Vol trading did become more difficult since options premiums include the risk free rate in premium calculation. Since risk free rate is near 0, the premiums are lower, so when I see advantageous time to sell Volatility I don't pick up as much premium as I would have back in 2004, for example. However, if you put Bollinger Bands around daily VIX price, you will find similar behavior of the index itself pre-QE and after-QE. As far as relationship to S&P 500, I don't see any changes at all. The correlation is still around -80% to -85% as it has been at least for a decade.

When did volatility become an asset class? Apparently the definition of asset class was liberalized enormously as the recent bull cycle transpired. Michael Resnick addresses a very important aspect of volatility trading. Procuring adequate payment for the risk is difficult. VIX and its cousins are largely misunderstood since the common wisdom conflates volatility and violent downward price action rather than recognizing it for what it is; a derivative based upon a decaying derivative.

In my opinion, volatility (VIX) trading is an effective vehicle for portfolio insurance against downside risks or for speculative trading. Its usefulness in portfolio diversification is limited. The way VIX is defined from implied vols and because of implied volatility smile, VIX spikes during market downturn and falls during upward market movement. As you note, -80% correlation with index moves makes it almost move in opposite direction in lockstep. Well diversified portfolios, on the other hand have components that have low correlation and can diversify idiosyncratic risk.

Larry - how do you personally define an asset class? I'd argue that volatility fits this simple definition http://www.investopedia.com/terms/a/assetclasses.asp

I agree - VIX and it's cousins are misunderstood...but that is what makes trading volatility so attractive! If everyone understood it, there would be no advantage to gain. If you can understand how to trade volatility, the gains are more than adequate for the risks, in my opinion. http://www.vixstrategies.com/

Samit - great point - the article should probably replace the word "diversification" with "hedging".