Currency Volatility Strategy

Every month the same amount of capital is invested in USDJPY 1-month volatility swap. The volatility swap obligates you at the end of the month to pay realized volatility and receive the predetermined strike whole level is associated with 1 month at-the-money implied volatility.

MacroVar offers 300+ Investment Strategies with higher returns, lower risk and losses than the Variance Swap Strategy

Volatility Risk Premium is the return investor A gets as compensation for insuring investor B for risk of losses during sudden increases in market volatility and extreme market events like financial crisis. Technically, volatility premium is the profit gained from the difference between implied and realized volatility.

Between 2001 and 2013 the market was paying 0.8% per day over what was actually realized. Implied volatility was 67% of the time higher than realized volatility for USDJPY 1-month volatility swap contract.

The volatility swap obligates you at the end of the month to pay realized volatility and receive the predetermined strike whole level is associated with 1 month at-the-money implied volatility.

Alternatively you can sell a 1-month at-the-money straddle and delta hedge it every day to receive volatility risk premium.

Market Risk Indicators are implemented to filter calm market periods where significant risk losses are small and other periods where market risk is high.

The Market Risk Indicators and Rules applied to this strategy are:

1. GARCH Model: if the difference between implied volatility and GARCH predicted actual volatility does not exceed a threshold, don’t take the risk of shorting volatility
2. VIX mode: if yesterday’s VIX closed higher than its own 1-month average, you stay away from taking on risk in receiving volatility risk premium.