Portfolio Strategies for Volatility Investing

The VIX premium, the difference between VIX futures and VIX Index levels, has been shown to have predictive power over volatility returns and investment risk. This article examines a conditional strategy applied within a portfolio construct allocating equally to market and volatility risk. Although it is predominantly short volatility, the strategy owns volatility during much of the financial crisis. Both long and short volatility allocations prove to be profitable over the sample period. They produce a portfolio with more consistent profits than the S&P 500 Index and several related volatility strategies developed in previous literature and those available as volatility-based strategy indexes.