- Theoretically, adding volatility to an equity portfolio offers diversification benefits. However, the VIX index itself is not directly tradable.
- Derivatives, like options, offer a way to get exposure to volatility, but they come with a number of undesirable side-effects.
- But more importantly, long investors pay a premium to hedge their risk, the volatility risk premium. On average a long VIX investment will result in a loss.
- Shorting the VIX index does provide a winning investment strategy, but shorting the VIX index increases your volatility risk, instead of reducing it.
- Besides, a short investment in volatility often feels like picking up nickels and dimes in front of a steamroller. Within a short period of time big losses can arise.