Volatility Derivatives

Kari Vatanen ()
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Kari Vatanen: Elo Mutual Pension Insurance Company

Chapter Chapter 5 in Derivatives Applications in Asset Management, 2025, pp 87-104 from Springer

Abstract: Abstract Exchange-traded volatility derivatives, such as VIX and VSTOXX futures and options, provide investors with powerful tools for managing portfolio risk and capitalizing on market volatility. These standardized instruments are widely used to hedge against market drawdowns, speculate on volatility movements, and implement advanced trading strategies. This chapter explores their mechanics, applications, and unique characteristics, such as mean reversion, negative roll yield, and the volatility-of-volatility risk premium. It delves into systematic approaches like the VIX carry strategy, which exploits the steep contango in short-term volatility futures, and the curve carry strategy, which mitigates drawdown risks by integrating hedges using longer-dated futures. The chapter illustrates how volatility derivatives enhance risk management and generate returns through detailed examples and analyses, emphasizing the need for disciplined execution and robust risk controls to navigate their complexities effectively.

Keywords: Exchange-traded volatility derivatives; VIX futures and options; Risk management; Roll yield; Volatility trading strategies; Curve carry strategy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_5

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DOI: 10.1007/978-3-031-86354-7_5

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