Why you should consider trading volatility

Investable assets are traditionally divided into cash, stocks, bonds, and alternatives. While investors are frequently familiar with the first three, alternative assets are sometimes poorly understood and frequently underinvested in.

At BASE Volatility Trading we believe it is crucial to have a good understanding of alternative assets like volatility and how volatility instruments behave to successfully navigate and invest in the growing volatility landscape.

Volatility can:

Volatility is a return engine that does not rely on interest rates, dividends, or price appreciation, making it particularly attractive for investors seeking other sources of returns.

Volatility products have a strong negative correlation with equities and so they add value as portfolio diversifiers. That negative correlation of equity volatility doesn’t just apply to the equity markets as you can find similar patterns in the credit market. Spikes in the credit spreads often coincide with rising equity volatility.

As well as being a portfolio diversifier, volatility can protect against certain risks. For example an investor who holds a stock or an index futures that could be affected either very positively or very negatively by a forthcoming announcement can keep hold of the stock/futures and hedge the risk with volatility.

As well described in the literature, traditional diversifiers offer less diversification opportunities during a financial crisis. Equity volatility, represented by the VIX, may serve as natural diversifier, as its negative correlation with equity and the other asset classes increases during the crisis period. The VIX and VIX Futures provide diversification benefits exactly when they are needed most.
As you can easily see below (performance of our Model Portfolio #1 – Pure Volatility), volatility trading can be extremely remunerative. Furthermore, historically, we can find that strategies investing in volatility have generated higher returns with smaller losses compared with traditional equity portfolios.
Directional - VX - Performance (VIX Future)
One the goal of BASE Volatility Trading is to point out the various benefits an investor can get by including volatility strategies in its opportunity set as alternative sources of returns.

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